If you want to understand property you need to get excited about demographics.
I know some of you are thinking the subject is boring and it doesn’t really affect the property market. But, you’d be wrong – demographics are a great way to see how the market will perform in the future.
What is Demographics anyway?
Very broad ranging stuff… so for the purpose of this article I’m going to simplify this and focus on age – it can’t be that complicated, right?
I will be discussing two parts on this topic over two articles: This article will be covering Age Profiles and next month I will be discussing Age Distribution.
Age profiles look at the various generations and analyse their attitudes towards life, money and property. Age distribution breaks down population into their respective age groupings – for example how many people are aged between 40 – 55 and will this grouping increase or decrease over the next 20 years.
Age Profiles: Let’s start stereotyping the Baby Boomers!
I am starting here rather than the generation before them as this generation coincided with the start of the phenomenon of property prices rising faster then incomes.
The Baby Boomers were born between the 1950s and early 1960s. This generation had an extraordinary chance to build wealth through residential property and many of them did just that. This group is now in their late 50s and 60s, and if they played their cards right their kids have moved out and the financial umbilical cord is truly severed.
Most of this generation is now focused squarely on retirement, and of course the grandkids! They are most likely pondering the meaning of life and wondering what are they going to do with all their spare time.
Whilst some of you may think this generation was quite lucky, there is no doubt they sacrificed and started sacrificing early. They were booted from their parents’ houses in their teenager years or very early 20s. They married in their late teens or early 20s, had kids and took out a mortgage all by the age most of generation Y were leaving to go back pack through Europe to “find themselves”.
They were a generation of savers – they were taught to save, buy a house, and enjoy the simple pleasures in life. In many cases the mortgage was such a priority that houses were paid off completely by the time this group were in their 30s. Unthinkable today!
When they bought their first house property prices were between 2 – 4 times their annual income, depending on their respective city. When they ran out of room, they upgraded using the equity in their home. Since values were rising, most of the time when upgrading they still managed to keep their debt 2 – 3 times their annual income (or lower). As interest rates fell through the 1990s some took this opportunity to upgrade again – still keeping their debt manageable, and in fact it was getting easier for the boomers from the late 1990s through the 2000s because as their income rose, property prices also rose yet the cost of debt (interest rates) fell dramatically. This generation were and still are particularly conservative with their spending and appetite for risk.
Generation X were born from the 1960s through 1982 and they also had a great opportunity to build wealth through residential property. Although, the tail end of generation X have found it much more difficult.
This generation is less easy to stereotype than their parents – some sacrificed, some didn’t – some got married early, some chose to go overseas and enjoy their younger years. Many attribute this to baby boomers pushing their kids to experience life before jumping straight in to a marriage and a mortgage. Eventually though, most got married and bought a house, but they were a good 5 years behind their parents.
So the majority of this generation left home in their mid-20s and got married shortly thereafter. This group started to come of age and purchase property from the mid to late 1990s onwards. It was a good time to buy property with prices roughly 3 – 5 times their yearly incomes and falling interest rates. Most of this group are now having or had kids, and are looking at upgrading or have already upgraded. Most people within this group have equity in their homes, therefore when they choose to upgrade they will take a large deposit to the next property. Again, like the baby boomers, this will enable them to keep the mortgage relatively manageable at 3 – 4 times their annual income. This group has also enjoyed rising prices, rising incomes and a decrease in the cost of debt.
Whilst this demographic group is upgrading and paying current market rates, they are upgrading with a large deposit as a result of time within a rising market.
Now to Generation Y or as my friend Bryce Holdaway from “Location Location” calls them – Generation Y leave home? The Ys are those born from 1982 through to the early 2000s. This group is now expected to pay 7 – 9 times their annual income to buy property. And not their age bracket’s average income but the national average income. This group is the least skilled and least qualified in the work force, which means their incomes are lower than average. If you rent, you can’t save for a deposit and if you buy you have no money for anything else. It’s a trap no matter which way you go. So what do you do? Study longer, travel, find yourself and defer all of life’s commitments, of course!
Let’s analyse this problem some more. The generation Ys and the late Generation X are well know for taking time to find themselves: going overseas and partying all the way through to their mid-20s. So most of this group have limited savings. They have allowed a good decade to get things organised after high school before they enter the dreaded MMs – marriage and mortgage.
It could be said that Generation Y is on the tail end of the of the largest property boom Australia has ever seen. They are going to find it very hard to step up and start consuming property like their parents did because:
Governments started to become aware of this issue in the mid-2000s and introduced a range of incentives: the first home buyer grant, first home savers scheme and then state governments followed with stamp duty concessions for investors and first home buyers.
One of the issues with governments is they all have a vested interest in rising property values – not only does it allow them to stay in power, but rising property values mean rising tax revenue. And what effect do you think all these incentives had – it pushed the market up more than the value of the incentives themselves. Completely counterproductive, especially as governments are starting to roll back these incentives and leave those not yet in the market even more disadvantaged.
The reality is if new consumers can’t afford property then the market needs to correct itself. Governments stepping in will only delay the inevitable.
Over the past 60 years the rising market has been like an exclusive party, great if you’re in and bad if you’re out. Once you are in the market, you get to jump from one small rock to another, but if you’re out the first rock is moving further and further away. For generation Y, this rock is starting to look like nothing more than a mirage.
Now for the purposes of this article, I have generalised aggressively, so if I haven’t described you exactly then come and see me for a one-on-one meeting and I‘ll make it up to you.
But the simple point is this – if you are generation Y and you do manage to save $50,000, you are still likely to take on debt 7 – 8 times your income. And that is more debt than we have ever asked any generation to shoulder. And generation Y are starting to ask (naturally) why should I take on so much debt, when you guys have already had the party?
I would like to make one last point. Since the GFC, rates of saving have increased across the country, which is seen by many as a good thing. The question is who is saving? Which generation? You guessed it – the baby boomers. With their houses paid off, their kids out of the nest – this group is now focused on preserving their wealth and saving for retirement.