The baby boomer generation are often enviously described as the ‘lucky generation’.
Certainly that demographic cohort born after the end of World War II and before 1960 enjoyed a very different economic and social backdrop to their parents and grandparents and that went a long way to changing attitudes to housing, money and retirement.
When it comes to wealth factors the sustained growth in residential property prices in Australia have benefited baby boomers in a significant and material way.
The intergenerational impact of that is increasingly a subject of national debate about whether property prices – at least in Sydney and Melbourne – are showing signs of being an asset price bubble which in turn fuels the discussion of housing affordability and the generational disadvantage that today’s younger generation are confronted with.
The baby boomers are not immune from the issue just because they are well-established in the property market. For many there is something of a pincer effect underway. Their adult children are living at home for longer – or perhaps are part of the boomerang effect where the call of independence sees them leave only for them to return a few months later as either financial reality of renting hits home and/or relationship dynamics change.
Then there is the challenge many baby boomers have of helping out ageing parents with accommodation as health issues make independent living more difficult. It has been interesting to read articles recently from architects and builders about the changing demands of house design away from open-plan to more zoned, independent living spaces.
Market forces at work.
Two family friends are a microcosm of the issue. One has just enjoyed celebrating turning 30, is working hard and has a disciplined savings regime going to build a house deposit. But watching house/apartment prices rise faster than savings is a massive disincentive while at the same time a big slice of weekly income for an inner Melbourne unit continues to go out in rent.
The other has just taken the big plunge into property with their first unit/townhouse. It is a long way from their inner city haunt but – as their parents pointed out – it is several levels better than the first house they bought.
Which reminded me of work done a few years back by renowned US economist Professor Robert Shiller.
Shiller developed arguably the best-known US house price index – now known as the S&P Case-Shiller index – so is well-equipped to opine on house price growth and certainly the US experience leading up to the global financial crisis when the market was awash with easy-to-get loans is a scary notion both for someone considering taking the plunge into a large mortgage today as it is for key market regulators like heads of Treasury and the Reserve Bank of Australia.
Shiller, speaking at an investment conference in the US back in late 2008, pointed out that the price inflation in house prices needed to be adjusted for the significant developments in housing technology and costs over the decades since the 1960s. His point was that the modern standard home today offers a lot more accommodation than the average home in the 1960s when the average first home was a very basic, typically two-bedroom form of accommodation.
Contrast that to today where new home developments are routinely are expected to offer three to four bedroom houses standard with ensuites and garages.
This is not saying first home buyers should be satisfied with a two-bedroom fibro shack with outside toilet. Some things are better left in the past but it is hardly surprising today’s first home buyers have higher baseline expectations around standard of accommodation and location.
However, it is not all doom and gloom because the younger generation do have a couple of advantages. For a start they have the powerful advantage of time. The other is that they will be the first generation to benefit from superannuation contributions across their entire working life. Although the occasional suggestion that super should somehow be able to be accessed for house deposits would significantly undermine that benefit.
The challenge with property is that it is such an expensive, lumpy, illiquid asset. It also comes with high transaction costs in the form of stamp duty.
The downside of very low mortgage rates are the even lower interest rates being paid on bank term deposits that are barely keeping up with inflation.
House deposits are typically thought of as short-term savings and invested accordingly to avoid risk of capital loss.
Superannuation is a long-term investment and the majority of it is invested in diversified portfolios with a fair portion of it in growth assets. What is perhaps required here is to borrow the idea of greater patience from previous generations and combine it with the modern day approach of investing in superannuation. While super is locked away for retirement there are numerous comparable investment funds outside the superannuation system that offer diversified investment approaches.
Diversified funds typically come in a range of risk profiles – similar to super funds – ranging from conservative to balanced to growth to high growth.
Naturally as you go further up the growth asset spectrum you are adding risk to the portfolio which is why a longer-term horizon is important.
Put another way it is when a savings plan becomes an investment and financial planning strategy.