Real Estate

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

To judge by the local debate, younger Australians' struggles to get on the housing ladder would vanish if they'd only buy fewer flat whites.

A deposit on a home might be more affordable if millennials weren't so willing to spend A$22 ($17) on smashed avocado on toast at hipster cafes, demographer Bernard Salt wrote in the Australian newspaper Saturday. It's a complaint often echoed by Stephen Koukoulas, economic adviser to former Prime Minister Julia Gillard:

A battle over lifestyle choices seems like a fun way to make the dry debate on one of the world's least affordable housing markets as colorful as arguments about baristas' tattoos. But it would be nice to ground all this in a little data.

If Australia has become a nation of spendthrifts thanks to the rise of the millennial dollar, it certainly isn't showing up in economic indicators. Since 2008, household savings have been running at their highest levels in three decades -- despite interest rates now at record lows, which should in theory be reducing the incentive to put money in the bank.

Perhaps the rise in saving is the result of prudent baby boomers setting aside money for a rainy day, while irresponsible youngsters splash their cash on Stan Smiths and facial grooming?

Stick It Under the Mattress
Australians are saving the most in 30 years despite interest rates at a record low
Source: Bloomberg, Reserve Bank of Australia, Australian Bureau of Statistics

Well, the Australian Bureau of Statistics occasionally collects statistics on household income and savings by age group, and the latest update indicates that younger people are saving more than any other generation -- fully 25 percent of gross income for those aged 25 to 34.

Save the Best for Last
Gross saving as a percentage of gross disposable income, by age group
Source: Australian Bureau of Statistics

The data only stretch back a decade, but even over that period there's been a sharp increase from 14 percent in 2004 . Those aged 15 to 24 -- who in 2004 spent more money than they earned, thanks to the costs of education and advances from the bank of mom and dad -- have now joined the sorry crowd of net savers.

That pattern looks an awful lot like the opposite of the situation Koukoulas and Salt describe. Rather than frittering their incomes away, young people are saving more now than any other generation, and more than their own age group did a decade ago.

The problem is that all that forgone consumption doesn't appear to be enough to keep up with the pace of house price inflation. Home costs have gone up from about three times household income in 1990 to more than five times, according to the Reserve Bank of Australia. As a result there's been a dramatic bifurcation in household net worth, with older generations rapidly pulling away from younger ones.

Pulling Up the Ladder
The household net worth of older Australians has pulled away dramatically from younger generations
Source: Australian Bureau of Statistics

Is there any reason for those who aren't looking to buy a home in Australia to worry about these changes?

Yes: Anyone invested in Australia's big four banks should take notice. At Commonwealth Bank and Westpac, the two biggest, more than half of credit exposures last December were to residential property, making housing an exponentially bigger risk than mining, for instance.

There are more signs than usual that the oft-heralded, yet-to-be witnessed popping of the housing bubble could be approaching. Rents are now rising at the slowest pace in decades and median home prices in Sydney are forecast to fall at the fastest clip since at least 2000. And if prices do start to turn, the banks are supporting a mortgage market that's changed dramatically since the first Gen X-ers were buying.

In the early 1990s, investors and first-home buyers both accounted for about 15 percent of new mortgage lending. Thanks to breaks allowing investors' taxes to be offset against the amount their mortgage costs exceed rental income, the investment side of that equation has since boomed, to about 50 percent of the total. First-home buyers, by contrast, now make up less than 10 percent of the market.

The Investors That Ate the Housing Market
Investment buyers now make up about half of the value of mortgage commitments in Australia
Source: Australian Bureau of Statistics
Note: Excludes refinancings. Value of first-home and non-first home loans has been calculated by multiplying loan numbers by average loan size.

The great thing about a market dominated by owner-occupiers is that people have emotional and lifestyle attachments to their homes. They're not going to sell just because their capital gains are disappearing -- and that factor reduces the odds that a housing downturn will turn into a rout.

By allowing older generations to turn into a class of rentiers to millennials who've lost all hope of getting on the housing ladder, Australia has discarded an important safety valve for its housing market, and by extension its economy.

That should be worrying those who've done well in the housing boom more than the amount youngsters are spending on their Sunday morning dukkah-baked eggs.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The data are based on Australian fiscal years ending in June.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net