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When housing 'wealth creation' leads to national wealth destruction

This article was originally published by Michael Janda on the 7th Nov 2016 via abc.net.au | Image: Ian Cutmore


The myth of the profligate Gen Y refuses to die.


Celebrity demographer Bernard Salt kicked off the latest round of baby boomer advice for their kids, and in some cases grandkids, with a throwaway remark about the number of young people eating expensive smashed avo brunches, which presumably should be the preserve of older home owners.


Mr Salt's anecdote was comprehensively demolished by Greg Jericho, who used statistical evidence to show that Gen Ys actually spend much less on food, alcohol and recreation as a percentage of their income than their parents did, and much more on housing.


But the myth that, as a generation, the baby boomers were so much better at saving than Gen Y and that is how they amassed the unprecedented wealth they now enjoy is almost impossible to kill.


My colleague Andrew Robertson revived it in two articles last week.


The first one conflates cause and effect - home owners have more wealth than renters, therefore home ownership must be a generator of wealth.


Of course, it could equally be the case that people who have higher incomes and more wealth tend to buy homes, while those in lower socio-economic groups are locked out.


I don't disagree that home ownership has been a great wealth generator for people who bought in during the early stages of a bubble and are now sitting on peak property price froth.


It's no different to buying shares in early 2009, straight after the financial crisis, and watching them soar as central banks prop the market up with cheap money.


Although how you take advantage of housing wealth unless you own multiple properties is unclear, unless you sell, anticipating a bust, rent for a while and then buy back more cheaply after it occurs. A pretty big gamble - just ask economist Steve Keen!


Decade with no life for a Sydney home deposit

The second article returns to the chestnut of how Gen Y could afford a home if only they stopped wasting money.


Robertson cites two brunches a week, two coffees a day and a $60 dinner a week as areas where many Gen Ys could save some cash.


Aside from the many responses I've heard from Gen Ys who don't spend anything like this much on such items, when you add up the savings it really isn't that much.


On Robertson's figures one could save just under $6,000 a year.


Let's be extra tight arse and cut out the booze, say $50 a week for $2,600 a year, save another $1,000 by holidaying up the coast in a caravan park instead of heading overseas and $400 more through buying cheaper clothes.


So let's assume it's reasonable to cut $10,000 in expenses and let's also assume, even though it's unlikely given their other spending habits, that our hypothetical Gen Y already saves $5,000 a year from their post-tax, post-HECS/HELP repayment income.


With a median home price of $800,000 in Sydney, it would take a single person more than a decade to save a deposit, so more than five years for a couple who were both saving $15,000 a year.


But first time buyers shouldn't be buying the median, or middle-priced, home I hear boomers respond.


Agreed. So let's take the median apartment price instead. Given the number of studios and tiny one-bedders out there, the median unit price probably gets you a pretty small apartment within 10km of the CBD or a two-bedder somewhere further out. Surely the boomers can't begrudge that as being excessively luxurious?


That's still $138,000 for a 20 per cent deposit, not including stamp duty, legal and moving costs.


For a single person that's still nine years of saving, or the best part of five for a couple, and that's assuming home prices don't keep rising faster than their incomes and the earnings on their savings, which has been the experience of the past four years.


Even a deposit on a Melbourne apartment is six-and-a-half years of saving for a single and more than three years for a couple, again not including other unavoidable purchase costs.


What if half of Gen Y simultaneously gave up smashed avo?

That's the individual challenge that Gen Ys face, even those on pretty decent incomes which are becoming rarer in an increasingly part-time and casualised labour market.


But what all of the analysis thus far has ignored is the macroeconomic cost.


Imagine for a second that hundreds of thousands of Gen Ys gave up all their brunches and coffees - cafes across Australia would be going broke.


Who do they employ? Often Gen Ys.


Likewise the restaurants, bars and retailers that would also be hit if Gen Y really did close their wallets completely.


This illustrates the problem with an over-inflated housing market, it absolutely sucks the life out of every other part of the economy.


Yes, the money that Gen Ys pay for their overpriced apartments goes to someone, but mostly it goes to already wealthy property owners, developers, real estate agents and banks.


People who have more money tend to spend less of it than those who don't have as much.


Given that household consumption is around 55 per cent of the economy, and retail plus hospitality account for well over two million jobs, it only takes a fairly small cut in total spending to push Australia towards a recession.


If that happens, then many of those unfortunate Gen Ys who took the advice to jump in at the top of the market will probably see their property values fall, and their jobs go too.


That's how a plan for "wealth creation" through ever expanding housing prices can lead to mass national wealth destruction.


Wouldn't it make more sense to advocate policies that will genuinely make housing cheaper than urging people to make ever larger sacrifices to afford a home?

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