Feelings matter in economics, and a person’s position within the housing market tends to determine how they feel about the past 20 years of house price inflation.
For Australians not resigned to renting their homes, the feelings progress something like this:
– For members of ‘Gen Y’ (now aged between 20 and 37), there is often despair that “I’ll never save a deposit for a home of my own!”;
– For members of ‘Gen X’ (more like 40 to late 50s), it’s something like “what a grind it’s been paying this mortgage, but at least we have a large capital gain”;
– and for the baby boomers, it’s something like “we’re sorry it’s hard for our kids to get into the market, but what can we do about it (and would you like to rent our investment property)?”
The long-entertained view that house prices would fall back so that they were more in line with the price-to-income ratios seen in the 1990s begins to look like a false hope -- and I write that as someone who took part in Steve Keen’s 280km ‘Debt March’ in 2010 to highlight the ‘problem’ of Australia’s ballooning mortgage debt stock.
A sharp price correction could still happen, but it looks increasingly likely that what we have observed is a historic ‘maturing’ of the finance industry that funds housing.
One aspect of that ‘maturing’ is the changing sources of debt funding. Without recapping on the history in detail, the late 1990s saw the rise of non-bank lending supported by securitised debt -- a sector that was substantially diminished by the GFC.
However, at the same time, banks also began to tap wholesale funding sources. The savings of East Asia in particular lowered the cost of funding right up until the credit crunch of 2008/09, and five years on from that, are once again providing a source of cheap deposits that allow Australian home-buyers to borrow larger amounts.
Another ‘maturing’ of this market was explained to me this week by Bank of America Merrill Lynch Australia’s chief economist Saul Eslake. He points out that the superannuation guarantee set up by Paul Keating in 1992 radically changed the flow of capital within the domestic economy.
Forcing all Australians to save 9 per cent of earnings (a figure that is now rising, in stages, to 12 per cent) means super funds have to look for productive homes for that cash -- and offering that cash on the wholesale market to banks has been one part of the asset allocation.
So, indirectly, Keating asked workers-cum-retirees to forego some consumption, and to invest some of the money saved in the homes their kids would one day want to buy or rent. Negative gearing tax concessions on housing only amplify this process.
Some have characterised this as a ‘war on youth,’ but Eslake simply says that he’s “amazed there isn’t more anger among young Australians” at the way these policies have “rigged the housing system against them.”
Those who reject the ‘war on youth’ tag, point out that with home ownership levels in Australia being high by international standards, the increasing ‘sophistication’ of the mortgage financing industry is just pushing Australians into lifestyles similar to other advanced economies -- home ownership here is a touch under 70 per cent, compared with just over 40 per cent in Germany, for instance.
Structural change often produces social discord. That “anger” that Eslake speaks of is loaded with political potential -- but only to the side of politics that can offer a real solution to make housing more affordable to youngsters.
And as both major parties rely on votes of Australians in the middle and upper age brackets, addressing the tax and investment policies that “rig” the market against youth seems virtually impossible.
That means that current asset prices and lending patterns might never ‘correct.’
So, what will happen if, for decades to come, young first-home-buyers are forced to either service enormous debts (that is, rent capital off the older generations) or resign themselves to renting properties owned by the older generation?
Well, not much, really. If the new financial landscape turns out that way after a 20 year evolution, then future generations won’t know any different -- in the same way that first-home-buyers in London, Tokyo or New York don’t know any different.
Only one or two generations will feel the pain of knowing that housing used to be cheap, and now isn’t -- knowing that the generation ahead of them rode a wave of rapid capital growth that they won’t be able to enjoy themselves.
Excluding the possibility of financial shocks for a moment (a big assumption, but something to consider elsewhere), Australia is entering a prolonged structural adjustment in which the next generation is likely to have a lower standard of living than older generations.
Wages growth, which was contained but still strong-ish during the Rudd and Gillard years, is now looking weak. Property prices are looking more resilient than many supposed possible. At the same time, the falling terms of trade is gradually whittling away our ability to enjoy goods and services in the tradeables sector.
That means the next generation of homebuyers will be doing it tougher than Gen-X and Gen-Y homebuyers, but with little recollection that things have ever been different. Homebuyers of ‘Gen-Z’ are more likely to shrug their shoulders and rent.
That leaves the Gen-Ys in particular as a ‘lost generation’. They long for things to be like the old days, but without the financial means to make it so.
In literary circles, the origin of the term ‘lost generation’ (génération perdue in French) is commonly attributed to the American writer Gertrude Stein, who was telling a young mechanic’s boss what a great job he’d done on her car.
According to literary historian James R. Mellow, the garage owner replied that really young staff were very good, but “it was the young men between the ages of 22 and 30, those who had served in the war, who could not be trained -- they were ‘une génération perdue’.”
Thankfully, relatively few Gen-Ys have been to war. But they have lived through a period of asset inflation and are also witnessing the ending of a historic terms-of-trade boom.
Australia’s lost generation, survivors of a boom rather than a war, may find themselves economically disorientated in ways that future generations, hopefully, will not.