Money Pit - Demographics Story

[Time to raise the rents.]

http://smh.com.au/news/national/money-pit/...3441337802.html

By Matt Wade and Ben Cubby

April 1, 2006

WERE you born after June 30, 1961? If the answer is yes, bad luck. Economic and demographic forces have been conspiring against you for decades.

That birthdate, almost 45 years ago, has become a crucial fault line in the distribution of national wealth.

More than three-quarters of all household riches are owned by those born before that date - an unprecedented portion for those over 45.

Australia's adult population divides fairly neatly around that day. There are about 8 million people over 45, and about 8 million under 45.

Of course the over-45s are worth much more than the rest - older people are always richer, on average, than young ones. But something unusual has happened: Australia has stretched this norm to a new extreme.

In 1986, over-45s owned about 70 per cent of household wealth but that has grown to almost $4 in every $5.

The director of Access Economics, Chris Richardson, says this proportion is excessive even by world standards. "This is a generational wealth split we have never seen before in Australia and, I suspect, [nor in] many other places around the world," he says. "Age is a clear dividing line in the national asset base. It's a gerontocracy."

Despite their good fortune, some members of this new gerontocracy are anxious about what it might mean. Peter Jeffery, a 51-year-old food technologist, says he has concerns for the ability of some of his children to ever own homes in Sydney.

"My two sons, I am worried about," he says. "I'd like to be able to give them some money, but I'm not in a position to do that. I'm less worried for my older daughter - she's doing medicine and she's a great student."

Jeffery and his wife, Nadia, a biochemist, bought their Lindfield home for $133,000 in 1984, and it has appreciated significantly, though they are still paying the mortgage.

"I'm expecting a fairly frugal retirement. I'm not going to be going on too many world tours," he says.

Bill Westwood, 69, a retired company executive and actuary, is deeply worried that the wealth divide might have cut his four adult children out of a comfortable life in the city.

"We made a decision to live in Sydney. Through no fault of their own, they have to face the Sydney property market," he says.

He and his wife are willing to provide them with financial help, if necessary. They have recently been through a "torturous decision" about whether to downsize their home and give some money to their children.

The couple's home in Northbridge was bought for £8000 in 1962. It it is now valued at between $1.4 million and $1.5 million. It is their intention to sell and move into a much smaller home within two years.

SO HOW did the lopsided wealth distribution evolve, and what might be the consequences? Two great property booms, one in the second half of the 1980s and the other lasting from the mid-1990s until 2003, are the main causes of the skewed allocation of wealth.

Financial deregulation in the mid-1980s, which relaxed lending restrictions on banks, made home borrowing easier and fuelled a rise in house prices before the 1990-1991 recession.

Then a period of low and stable inflation allowed a sharp reduction in interest rates, slashing the cost of home borrowing. These favourable conditions helped fuel another long property boom, which doubled the nation's home prices. Changes to capital gains tax in 1999 - which made housing investment even more attractive - also contributed.

The unique demographics of the postwar period also played a part.

A KPMG demographer, Bernard Salt, says the sheer size of the baby-boom generation - born between 1946 and 1961 - meant house prices had to rise. "The demographic weighting of the baby-boom generation trying to buy into the relatively scarce housing of the pre-boomer generation created a price boom that will not be repeated for subsequent generations. There is not the same demographic drivers to create the same multiples of property price gains over the next 25 years."

The outcome of these economic and demographic conditions is a wealth bonanza for those aged over 45.

One way of looking at the disproportionate pile of riches held by older people is that they will have to pass it all on when they eventually die.

Richardson says the present wealth distribution will eventually result in an extraordinary transfer of assets, but this will not start for at least 10 years and won't peak for another 20 to 30 years. "We will see the biggest transference of inheritance wealth, in proportional terms, in coming decades but we are not anywhere near there yet."

However, some researchers in this field believe a lot of would-be inheritors will be disappointed.

A Flinders University academic, Lisel O'Dwyer, studied the impact of house sales and inheritance on wealth in South Australia in the years leading up to the property boom.

"Housing was distributed for the first time right through society, and people were wondering, 'Is this going to be the next big socialist revolution, or what?"'

It turned out that inheritance patterns meant wealth wasn't being shared around more freely than before, though. "I looked at the

situation in Australia, and found that it wasn't having that much effect on redistributing wealth to those who didn't already have it," she says.

"People usually inherited in their 40s, 50s and 60s, when they had usually already gone into home ownership themselves. Also, a parent's house was usually divided between the children."

Simon Kelly, from the National Centre for Social and Economic Modelling (NATSEM), has identified several trends that suggest greater wealth does not necessarily mean larger inheritances for everyone.

First, the wealth residing with the old is not evenly distributed. The richest 20 per cent of those aged over 65 own nearly two-thirds of the assets held by that age cohort. Just 37 per cent of the wealth has been left with 80 per cent of the over-65s. This dramatically reduces the inheritance pool for most Australians.

"Our research shows your chances of getting a really big inheritance are relatively low," Kelly says. "Big inheritances are going to those who don't really need them."

Second, longer lifespans and advances in medical technology mean elderly people will have to "consume" a much bigger chunk of their assets than in the past.

Baby boomers have much higher expectations for their retirement lifestyle than previous generations did, but relatively low retirement savings. Many will be forced to liquidate assets to live in the manner to which they are accustomed. New financial products will make it easier for retirees to use housing equity to pay for what they want.

The market for one of these products, the reverse mortgage, is growing rapidly. A reverse mortgages allows a retiree to take out a loan without making interest payments. The loan, plus interest, is repaid when the borrower dies or moves out of the property.

The total value of reverse mortgages has doubled in each of the past two years and is expected to reach $3 billion by the end of the decade.

Debt-savvy baby boomers are much more likely to use new financial products than previous generations have been. A recent survey found that a quarter of respondents expect to consume all of their assets before they die.

The third trend, says Kelly, is that attitudes to inheritances are changing and intergenerational altruism may be on the decline.

"Improved mobility means more people live independently interstate and overseas than in the past, and fewer children are remaining in family businesses. These trends may also reduce the incentive for a straightforward transfer of wealth to the next generation," he says.

One expression of this is "generation skipping", where people leave their estate to grandchildren rather than children.

More people may choose to make bequests to charity rather than to family members, especially if their children are well established.

Philanthropy Australia, a peak organisation that studies donation patterns, says staff have noticed an increase in people bequeathing money to charity, though no national figures are available.

Its chief executive officer, Gina Anderson, says: "I think there's no doubt that it's an area that's growing … but we don't have any research yet that actually demonstrates that at this stage."

The mismatch in wealth between the old and the young has always been a sore point, but both Kelly and Richardson believe the wealth disparities will push intergenerational conflict to new heights.

"You will have a situation where people are in retirement, and on paper very wealthy, but they are getting the pension and lots of extra health care. Whereas younger people, who are poorer than they are, have to pay higher taxes to support all these old people in their retirement," Kelly says.

"There is going to be greater intergenerational tension between these two groups."

Richardson says the present under-45s will have to "sit there forever", watching those older than them enjoying an extraordinary chunk of the nation's wealth. "It will be a frustrated cohort."

There is some high-profile backing for these warnings.

In 2003, the Reserve Bank governor, Ian Macfarlane, raised the prospect of damaging intergenerational friction. He said the young may resent the tax burden they have to carry to pay for pensions and health care for the elderly, especially when they know the elderly own most of the assets.

Macfarlane warned that housing was an obvious flashpoint, as those aged 45 and above reaped the benefits of 30 years of asset price inflation, while new entrants to the workforce struggled to buy their first homes.

He advised "giving priority to tomorrow's working-age population, rather than satisfying the demands of yesterday's".

Maybe the most dangerous fault line is between baby boomers and Generation X - now aged between about 26 and 40.

"Generation X is really the squeezed generation," Salt says.

NATSEM figures show that age group's share of the national wealth pie has slumped from 27 per cent in 1986 to just 19 per cent. The reason for this is Generation X's unusually low rate of home ownership, the main source of household wealth.

In 1989, 64 per cent of 25- to 40-year-olds owned a home but that fell to 54 per cent by 1999, according to NATSEM.

Some members of Generation X are relying on their parents to give them a hand. Liz Fanos, 54, has two daughters in their 30s who moved to Melbourne to escape Sydney property prices. Fanos's Lilyfield home has doubled in value in the past few years, and she is considering using some of that wealth to help out her children.

"I was helped by my mother when we were buying, as well," she says. "She was of the mind that it's best to give something while you're alive and, probably, young people need a helping hand more than I would."

However, it's unlikely parental help will prevent Generation X from having a much lower rate of home ownership than previous generations did.

But Generation X does have one consolation. Its average income per head is now higher than the baby boomer by about 14 per cent, Access Economics estimates.

But that is mainly because a bigger proportion of Xers have to work.

Plan targets the very rich

One way to ease the stranglehold the gerontocracy now exerts on national wealth may be to introduce an inheritance tax on the very rich.

The tax, employed in some form by all OECD nations except Australia, is imposed on the transfer of deceased estates that are left to people. Inheritance tax, or "death duties", was abolished in Australia in 1979, when John Howard was treasurer under the prime ministership of Malcolm Fraser. The system had come to bite ordinary, middle-income families because it was not indexed to rising income levels.

But an inheritance tax with a high threshold, indexed to rising incomes, could be an important social leveller, some say.

"We should do what we can to make sure that children start at the same starting line," says Andrew Leigh, an economist at the Australian National University. "At the moment, some kids start a long way ahead."

Leigh and some of his peers propose a tax on the transfer of wealth for individuals with more than $1 million, starting at 5 per cent and rising to 15 per cent for the extremely wealthy.

Supporters of the plan say it is a very efficient way to raise revenue - even the very rich must leave an inheritance at some point - but its many detractors say it would be political suicide, evoking images of grieving families torn from ancestral homes.

Leigh suggests exemptions could be made to preserve family farms and safeguard less wealthy families, but the Coalition and Labor have shown little interest in backing the idea.

[Guest Winners and Losers]

I TOLD YOU SO!!!!!!

[Guest Charlie The Tramp]

Of course the over-45s are worth much more than the rest - older people are always richer, on average, than young ones. But something unusual has happened: Australia has stretched this norm to a new extreme.

Yes I remember when I was 27 years old in 1970, I was buying a 2 bed maisonette and owned a 6 year old mini van. All the over 45s I knew had nice big houses and modern cars and many went on long haul holidays, whereas I had to be satisfied with a week in Devon. It took 20 years from then to save £20k.

[Time to raise the rents.]

There is only 1 way I can see that can redress this imbalance (and some will note how nicely I'd do out of my 1 way) - let inflation rip.

That's the only way the younger gen will catch up whilst the older gens savings can be eroded away. A redistribution of wealth back to the working age folks.

Edited April 1, 2006 by Time to raise the rents.

[CrashIsUnderWay]

this retard cant seem to understand the difference between 'inflation' and 'wage inflation'.

Only wage inflation can help sort out the house price mess. And wage inflation, unfortunately, can't be generated internally in a global economy.

interest rates are going up, rents are going to fall, TTRTR is going bust

SHAMMMMME

[Guest Charlie The Tramp]

There is only 1 way I can see that can redress this imbalance (and some will note how nicely I'd do out of my 1 way) - let inflation rip.

That's the only way the younger gen will catch up whilst the older gens savings can be eroded away. A redistribution of wealth back to the working age folks.

In this day and age I don`t think that would work. High wage inflation means high IRs and higher returns to the savers, more or less keeping a neutral position which is better than going negative. Meltdown for the debtors and those with big mortgages, and by avoiding purchasing things you don`t really need can keep yourself in front. My strategy in the early 90s when I came out ahead.

[Time to raise the rents.]

If you had a clue about anything CIUW, you'd understand that the 70's was just such a time, when inflation was let rip, but the economy was tough in most western economies. The result was higher nominal house prices, lower real house prices & savings eroded along with higher wages. So the inflation I speak of, is price & wage inflation, not real HPI, but certainly nominal HPI would do fine to keep the banks at bay.

That way, youy can all afford a house in years to come, but your Mum's & Dad's retirement fund will lose 'real' value.

In this day and age I don`t think that would work. High wage inflation means high IRs and higher returns to the savers, more or less keeping a neutral position which is better than going negative. Meltdown for the debtors and those with big mortgages, and by avoiding purchasing things you don`t really need can keep yourself in front. My strategy in the early 90s when I came out ahead.

But that's exactly what I'm saying. For inflation to take off, the govt has to allow it to do so. The policy now is not to allow high inflation. All that is needed is a new target, or a govt that wants to change the rules of targeting to also officially target growth for example.

But these things won't happen unless the economy moves into recession, but frankly that is exactly what I expect it to do soon enough, largely because of low inflation & the fact that all these debts need to be paid off, but mainly because of demographics. These are all things the HPC bears love to post, but they seem to think the only possible outcome in an HPC. I think the outcome will be a rethink by the govt of the day or it's successor.

[MarkG]

If you had a clue about anything CIUW, you'd understand that the 70's was just such a time, when inflation was let rip, but the economy was tough in most western economies.

If you had a clue about anything, TTRTR, you'd understand that the 70s was a time when _WAGE_ inflation was let rip.

That was possible in an era where jobs were unionised, industries were nationalised and there was no Internet, but it's not likely to happen in an era where most jobs can be exported to China for $0.50 an hour.

Back in reality land, inflation of essential items without wage inflation mean people have less money to waste on rents or mortgage interest, which mean house prices drop and landlords who borrowed millions to buy overpriced houses go bankrupt.

[Without_a_Paddle]

this retard cant seem to understand the difference between 'inflation' and 'wage inflation'.

Only wage inflation can help sort out the house price mess. And wage inflation, unfortunately, can't be generated internally in a global economy.

interest rates are going up, rents are going to fall, TTRTR is going bust

SHAMMMMME

typically doesn't rent rise with wage inflation? (or just above wage inflation)

If we get inflation and higher rates we WILL get higher wage inflation which means rents will rise not fall.

Look back to the late 1980s and watch those rents rise yoy with double digit inflation...

Of course, it's different this time, isn't it CIUW?

Back in reality land, inflation of essential items without wage inflation mean people have less money to waste on rents

Where will these tenants live if they refuse to pay the higher rents? Surely they won't buy a house?

That was possible in an era where jobs were unionised, industries were nationalised and there was no Internet, but it's not likely to happen in an era where most jobs can be exported to China for $0.50 an hour.

If 'most' jobs can be offshored cheaply then why is there 'only' 5% unemployment in the UK?

Edited April 1, 2006 by Without_a_Paddle

[Guest Charlie The Tramp]

That was possible in an era where jobs were unionised, industries were nationalised and there was no Internet, but it's not likely to happen in an era where most jobs can be exported to China for $0.50 an hour.

Exactly, does anyone think today`s employers who now have the upper hand would be happy paying huge pay rises. They prefer no pay increases at all so as to boost their profits or outsource and create mega profits for themselves. It`s pick pocketing on a massive scale.

It really is different this time, it will be a slow strangulation affecting a few million debtors who will be sacrificed to correct the imbalance. What`s 7% rates, historically still low.

If 'most' jobs can be offshored cheaply then why is there 'only' 5% unemployment in the UK?

Not forgetting the 8 million of working age classed as economic inactive.

[MarkG]

Not forgetting the 8 million of working age classed as economic inactive.

And the millions of new government employees: a newspaper article I read a few days ago pointed out that the reduction in unemployment under labour was almost the same as the increase in government employment.

And the millions whose jobs rely on the continuation of the housing bubble: EAs, construction workers, DIY store workers, etc.

And the millions taking worthless degree courses which remove them from the unemployment figures for a few years.

The simple fact is that 'unemployment' is a worthless measure of the health of any economy, since even a retarded monkey can hire millions of people to dig holes and other people to fill them in... for a few years, until the cost of doing so destroys the economy.

Worse than that, even if people are working in real jobs, when a 40k a year programmer is sacked because their job is outsourced to India, then hired as a 5 pound an hour burger flipper, it's certainly not going to help the economy, but would show no change to the unemployment figures.

Edited April 1, 2006 by MarkG

[Time to raise the rents.]

If you had a clue about anything, TTRTR, you'd understand that the 70s was a time when _WAGE_ inflation was let rip.

That was possible in an era where jobs were unionised, industries were nationalised and there was no Internet, but it's not likely to happen in an era where most jobs can be exported to China for $0.50 an hour.

Back in reality land, inflation of essential items without wage inflation mean people have less money to waste on rents or mortgage interest, which mean house prices drop and landlords who borrowed millions to buy overpriced houses go bankrupt.

So in the 70's, wages went up & nothing else.....

[MarkG]

No, in the 70s _wages went up with everything else_. That's not happening now, when inflation is already high, because few workers have any pricing power for their labour.

What exactly is so difficult to understand about this?

[Guest Charlie The Tramp]

So in the 70's, wages went up & nothing else.....

In 1976 HPI went -13% and did I jump at the opportunity moved from a 2 bed maisonette to a 4 bed detached at 3x salary.

As things went up people changed their spending habits, went for second hand instead of new cars, as for food, the farm and freezers were the rage of the day. Strange when I think back people seemed to be content and happy even through difficult economic times.

[Time to raise the rents.]

No, in the 70s _wages went up with everything else_. That's not happening now, when inflation is already high, because few workers have any pricing power for their labour.

What exactly is so difficult to understand about this?

Inflation is low. No matter what you bears say, it is low. I can still buy things down at the local shops for very close to the price I paid years ago and often for less.

When this changes, I'll agree with you that inflation is high. Until then I'll point out that inflation is low & wage inflation is higher than goods inflation now.

[Unexpected]

So in the 70's, wages went up & nothing else.....

Okay. For arguments sake lets assume that inflation goes up to 10% and interest rates go to 12%.

Great for you eh TTRTR because your mortgages will be inflated away and you will be able to put up your rent by 10% every year. Excellent. You're going to be rich and your properties will soon be worth double your mortgages.

Oh, hang on a moment though. What will happen to your mortgage payments while all this is going on. seems to me that they will go up to 12%. Can you afford that? That would be like double your outgoings at least while only pulling in 10% a year extra. And what about that property inflation? Well most people, not being as rich as you can now only afford x amount per month on property so at 12% they can only afford to borrow half what they could before. Oh dear. Not good for you then is it as the crash will have happened by then and your property will have halfed in value. Never mind though, just think about that extra 10% in rent.

[Time to raise the rents.]

Okay. For arguments sake lets assume that inflation goes up to 10% and interest rates go to 12%.

Great for you eh TTRTR because your mortgages will be inflated away and you will be able to put up your rent by 10% every year. Excellent. You're going to be rich and your properties will soon be worth double your mortgages.

Oh, hang on a moment though. What will happen to your mortgage payments while all this is going on. seems to me that they will go up to 12%. Can you afford that? That would be like double your outgoings at least while only pulling in 10% a year extra. And what about that property inflation? Well most people, not being as rich as you can now only afford x amount per month on property so at 12% they can only afford to borrow half what they could before. Oh dear. Not good for you then is it as the crash will have happened by then and your property will have halfed in value. Never mind though, just think about that extra 10% in rent.

What makes you think that would be the case? Why not inflation at 10% & IR's at 6%? Why not?

That would be quite possible, it's happened before. And that is what I mean when I say 'letting inflation rip'.

[Unexpected]

What makes you think that would be the case? Why not inflation at 10% & IR's at 6%? Why not?

That would be quite possible, it's happened before. And that is what I mean when I say 'letting inflation rip'.

Yes, it is almost happening at the moment if you think in terms of real inflation and not CPI. Has it ever happened before with wage inflation though?

Has general wage inflation ever been higher than borrowing rates?

[needle]

There is only 1 way I can see that can redress this imbalance

Arent the Aussie demographics different from the UKs?

Where will these tenants live if they refuse to pay the higher rents? Surely they won't buy a house?

If 'most' jobs can be offshored cheaply then why is there 'only' 5% unemployment in the UK?

WaP - What will the landlords do if the tenants refuse to pay higher rents? The rental market would collapse and HPs with it.

Aside from that, in the worst cases tenants can get social welfare assistance; landlords can not.

What makes you think that would be the case? Why not inflation at 10% & IR's at 6%? Why not?

That would be quite possible, it's happened before. And that is what I mean when I say 'letting inflation rip'.

Why not? Because thats what they tried in Japan and property prices (as well as everything else) fell for 15 straight years. It would be possible but do you seriously think any government would try this? I'm gobsmacked that you even consider it a solution. Let inflation rip to save the uber-mewed few ?

You are starting to sound just a teensey-weensey bit mental....

FYI - those above 5% are called 'sick' apparently. Real dole is higher than France and Germany

[Randall Herbert]

Inflation is low. No matter what you bears say, it is low. I can still buy things down at the local shops for very close to the price I paid years ago and often for less.

When this changes, I'll agree with you that inflation is high. Until then I'll point out that inflation is low & wage inflation is higher than goods inflation now.

Inflation is 6-8% period!!!

EVERYONE KNOWS THAT!!!

d-i-c-khead

[Red Baron]

What makes you think that would be the case? Why not inflation at 10% & IR's at 6%? Why not?

TTRTR, you fight the good fight and I greatly respect you for it, but this is one of the least intelligent posts I have seen you make.

We might possibly see inflation at 10% and IRs at 6% (which would be regarded as neutral not so many years ago), but it would have to be married by matching wage inflation and I simply do not see that in the current climate; employees simply do not have the clout to provide the wage-push in a global economy where jobs are migrating to cheaper resouces overseas.

High inflation and a moderate increase in IRs, without matching wage inflation, will simply lead to a collapse in house prices.

[bpw]

the point many seem to miss is that the current inequity is created by government and not by demographics. The Turner report on pensions is a good example of how Labor are distorting morality in favour of self interest and political bias towards those over 45. Its harder to say no to this generation of pensioners that it is to say yes to the next generation.

Here is a solution:

increase taxes on well funded corporate pensions

reduce the cost of the state by privatisation

increase the public sector pensions ages to 67 for men AND women

increase inheritance tax

You can all add others and we can all start to demand fairness.