A lifetime of devalued earnings?

A little bit on the Australian bubble from On Line Opinion:

Busting the boomers

Economist Rory Robertson was recently quoted as saying “… there simply is no getting around the fact that the unexpectedly rapid increase in home (including land) prices has significantly devalued the lifetime earnings of non-homeowners, particularly young people.”

The scale of this devaluation of earnings for the current generation of first home buyers is hard to quantify exactly, but to get some idea, we can consider that over the last 20 years Australian median house prices have gone from four times median income to about seven times median income.

If Sydney prices were on the 1986 multiple today, the median Sydney house would be $299,000 instead the current $523,000 (ignoring interest rate variations over both periods). For first home buyers in Sydney today this equates to $224,000 extra to be paid on the purchase price of their house. Over the life of a 20-year mortgage including interest (at current rates) this blows out to a massive $453,000 extra to pay.

This $224,000 upfront cost to new home buyers is of course a $224,000 benefit to those with homes bought before the boom and in particular those with multiple houses bought before the boom. In generational terms, with the average age for a first home purchase being about 30 that means the main beneficiaries are people born before about 1968, a demographic overwhelmingly populated by the baby boomers (born approximately 1945-1961).

If we were to achieve a price correction then housing could return to be the unexciting low return way for another generation to build their net worth and own their own home. Of course to do this some of the boomers may have to give up some ill-gotten gains.

If we do not correct housing prices then we will head further back down the path to be a country of landlords and tenants. In Australia today about 26 per cent of people rent. This is up from 23 per cent a decade ago and young people are increasingly disproportionately represented. It is unlikely we will ever reach the low levels of ownership seen in Britain before World War I where about 90 per cent of people rented their homes, but for a more equitable future we should aim once again to be a nation of home owners and not renters.

As in England back then the only way for this to happen is for a large number of landlords to be effectively forced to sell and for those who are currently tenants to be given every opportunity to buy at prices they can afford. It may bust some of the boomers, but it would only be fair.

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