A new study by the Grattan Institute on wealth across generations shows that the older Australians benefitted the most from the strong economic times of the early 2000s, and that by virtue of being effectively shut out of the housing market, members of “Generation Y” may be the first generation to be less wealthy than that of their parents.
Whenever younger generations are discussed in the media, invariably comments will be made that Generation Y are unemployable, lazy, spendthrifts who need to learn discipline if they want to get ahead. They’re essentially the same comments that were made 20 years ago about Generation X and 15 or 20 years before that about the various incarnations of the baby boomer generation. Very little changes.
But a new report by the Grattan Institute’s, “The Wealth of Generations” suggests that one aspect of Generation Y is different from previous ones – they are on track to have less wealth than the generation before them.
The report makes it abundantly clear that the good economic times of the late 1990s and early 2000s were of benefit mostly to older Australians, and such people “are capturing a growing share of Australia’s wealth, while the wealth of younger Australians has stagnated”.
In 2003-04, households whose main earner was under 34 accounted for 6.52% of all household wealth in Australia. By 2011-12 such households only accounted for 4.52%:
The biggest eaters of the wealth pie in that time were those over 55. They now hold 58% of all wealth, up from the 51% held by such households back in 2003-04.
But it is not just in the share of the pie that the younger generations lost out, their wealth has also gone down in real terms.
The Grattan Institute found that households across all age groups are wealthier now than their comparative aged households were in 2003-04. All that is except for those aged 25-34 years.
The wealth of households aged 45-54 years old from 2003-04 to 2011-12 grew by $163,000 (in 2012 dollar terms) – a 23% increase. Those aged 55-64 saw their wealth in that time rise $174,000 (19%), while the wealth of 65-74 year old households rose a staggering $216,000, (27%).
The households of 24 to 34-year-olds however lost $10,400 in wealth – a 4% drop:
So where did all this wealth for older households come from?
The big factor was housing.
Across all households housing accounts for around half of total net worth. And while, for example, households in the 55-64 year age bracket might hold on average $467,000 in housing assets, those in the 25-34 bracket hold just $183,000:
Not surprisingly, older aged households also hold more superannuation than younger ones.
Had you taken a snapshot of the breakdown of the wealth by age bracket any time in the past 30 to 40 years, a similar picture would likely have emerged. Younger households generally will hold less wealth in housing because, as a general rule, your first home purchase is smaller than is the case when you age, gain more income and then “upscale” to a bigger home when you start a family.
The problem is that is not what is happening now.
Since 1981, roughly 70% of all Australian households have been homeowners. There has been a slight fall since the GFC and now the rate is around 68%. However, the big change has occurred in the age of homeowners.
In 1981, 61% of 24-34 year olds owned a home, now it is just 48%. For 35 to 44-year-olds the drop is from 75% to 65%. By contrast in 1981, of those aged over 65, 78% owned a home – now it is 82%:
The fall in home ownership rates since 1981 has not just been younger folk either, it is poorer households as well.
Across all age groups the decline in home ownership is characterised by the biggest falls coming from the poorest of households, and across all income groups the drop off in homeownership also declines with age:
The reason for the decline becomes clear when you look at the comparison of house prices and average income since 1970:
From 1970 to 1997, the average full-time earnings grew at roughly the same pace as housing prices. But since then, while average earnings have grown by 27%, housing prices have grown in real terms by 121%.
Given the lack of wealth younger people have to use as collateral for a loan, this has meant the amount of savings required to afford a deposit for a home loan has exploded well beyond what similar first home buyers needed 15, 25, or 40 years ago.
This situation is further hampered by the fact that 20 to 24-year-olds on average have less pre-tax income than people did in the 1980s and 1990s:
This in itself is a good thing as it actually means such people are staying longer in education, but it means it takes longer to build up savings and, thus again, makes it more difficult to raise a mortgage deposit.
The increase in wealth has also come from government benefits. The mining boom, which brought large increases in revenue for the government, also saw a large increase in benefits and government spending – especially in health.
Households of those aged 65 and over now receive around $8,500 extra a year in health benefits and $4,344 in cash benefits than similar households did in 1998. Once taxation changes are included, such households are now $12,689 better off a year from government benefits.
By contrast, 25 to 34-year-old households are just $2,723 better off than such households in 1998.
The mining boom and the rise in incomes it created spurred a housing and taxation revenue boom. It was a boom that benefitted those who already held the most wealth in Australia. The housing boom has without any doubt made it more difficult for Generation Y to buy a first home than any generation before them.
Rather than a rising tide lifting all boats, the baby boomer generation massively improved its own wealth position while the younger generation have found themselves less wealthy than were their forebears, both in the share of the wealth pie, and in real dollar terms.
Little wonder that they get a bit tetchy when they’re told their generation is too lazy and just needs to save up and work hard like their parents did.