Millennials vs Boomers on home ownership – who’s right?

Millennials vs Boomers on home ownership – who’s right?

You’ve heard it all before – young people saying they’re priced out of the housing market because Baby Boomers and their Gen X partners in crime own all the good property.

In response, plenty of older people argue that it’s always been a slog to buy a house, often pointing to 17% mortgage rates in the early 1990s.

Here’s the quick summary of the usual claims:

Boomer/Gen X:

“We bought our family home when interest rates were more than 19%. We managed to pay off the mortgage while raising a family, because we didn’t spent money on takeaway food, trips overseas or fancy clothes. We bought a house we could afford, and upgraded to a larger home when we were more established.”

Millennial:

“Okay Boomer, but you only paid $90,000 for that house in 1989 and now it’s worth $1.5 million. We can’t buy a house anywhere because cashed-up retirees are happy to pay too much at auction. We’ve got a 10% deposit, and the bank will only lend us enough to buy a bedsit 60 kilometres from the CBD.”

Perhaps this is a debate that can never be resolved. A number of financial institutions have tried, comparing the cost of home ownership in the early 1990s to now.

The key factor in a ‘then and now’ comparison is interest rates. Three decades ago, homebuyers were paying a standard variable mortgage rate of around 17%. Even today, after a string of rapid-fire rate rises by the Reserve Bank, borrowers are still paying less than one third of that.

Of course, there are many other factors at play. Easy money at ultra-low rates over the last decade fuelled a speculative property boom across the globe. Australia’s tax policies tend to overwhelmingly favour investors ahead of homebuyers. And rather than being treated like a home, houses are increasingly regarded as a financial investment – a commodity to be traded, or rented out on Airbnb.

Most spreadsheet jockeys employed by the investment banks look at data like interest rates, household income and property prices, and conclude that housing affordability isn’t much worse than it’s been in the past. By the numbers, they would be correct.

But we really should consider what else has changed over the last 30 years.

Workforce participation

The days of married women being banished from the workforce were long gone by 1990, but the majority of working-age women still stayed at home. Men generated the bulk of household income, and two-income households weren’t the norm. Until the ‘Recession we had to have’, that is.

When the 1990 recession hit, hundreds of thousands of jobs were lost. Many of those jobs were in manufacturing and middle management – typically men in their prime income-earnings years, who most likely had a mortgage to pay.

Unemployment peaked at over 10 per cent. At the same time, mortgage rates were still hovering around 14 per cent. While men were losing their jobs, women were entering or returning to the workforce in droves to try to balance the household budget. And being paid less for the privilege.

Overall, household incomes declined sharply but interest rates remained high for years. That’s a tough environment for homebuyers compared to today, where unemployment is below 4 per cent.

Superannuation

Before 1992, only public servants and employees of larger corporations benefited from superannuation. The introduction of the Superannuation Guarantee changed all that, but it was many years before account balances rose to a meaningful amount for most workers.

Working baby boomers had a double challenge – paying off a mortgage, and putting aside some savings to tide them over in retirement.

That’s a big drain on the family budget, and one most people needn’t bother about today, because over a full working life, the Super Guarantee is usually enough to fund a comfortable retirement.

These days, there is also the benefit of the First Home Super Saver Scheme, which allows people to use their superannuation fund to build a deposit tax-effectively. .

The Castle

They’re disappearing fast, but in some of Sydney’s western suburbs you’ll still find the dream of many young families of the era – a simple 3 bedroom home with a single bathroom.

You’ll have to search to find one. Most were tiny, cheaply-build houses on large blocks and have long-since been bulldozed and subdivided.

By 1990, houses had become bigger (think four bedrooms, with perhaps even 2 bathrooms).

Today, new builds are typically 50% larger than that 1990 house. Obviously, those extra bedrooms, media room and swimming pool come at a cost. And the size of the block will be tiny. If there’s a backyard, it will be the size of a postage stamp.

Three decades ago, those small three-bedroom properties were a target for first homebuyers. Yes, they were often cheap compared to the 260 m² houses of today, but the buyer didn’t get as much for their money.

This is a perennial problem with valuing real estate – and why the median prices of 1990 aren’t easy to compare with current median prices – because the median property will be totally different.

The future

The truth is, it’s never been easy for most Australians to buy their first home.

In the short term, buyers may get some relief from falling property prices (although rising interest rates might counterbalance that).

But looking further into the future there is a whole range of potential problems for homebuyers to face – everything from rising sea levels to population pressures.

In fact, there’s a strong chance a new that in 30 years, a new generation of homebuyers will look back at 2023, and say “Millennials had it easy.”

This article contains factual information only and is not intended to be general or personal financial advice and is for educational purposes only.