Twenty-seven years ago this week, I had to have my arm twisted to buy a home. Surely a one-bedroom flat in stinky old Bondi – without parking – couldn’t ever go higher than an extortionate $164,000. I wanted to wait until prices came down, but was manhandled into the purchase.
My salary was about $40,000 (who says journalism doesn’t pay! ) and the arm-twister was on about the same. The interest rate on our mortgage was 9. 5 per cent.
Today, the same jobs pay about $75,000, keeping pace with inflation thanks to a strong union. The mortgage rate would have fallen to something like 4 per cent. But the flat was recently sold (not by us) for $1. 2 million. So while wages, if they have matched inflation, have doubled in 27 years, the price of that Sydney one-bedder has multiplied by seven. And it still doesn’t have parking.
When Millennials are told how lucky they are to have come of age amid historically low rates of interest and inflation, and must now brace themselves for a return to normal levels, excuse them for laughing. Or crying. Their experience is not of halcyon days of price stability; it is of uncontrollable inflation in the most significant purchase of their lives, and which guides most other spending decisions.
The intergenerational property divide is the deepest and meanest wedge in Australian society; as it deepens further, it is changing our country in ways that we are nowhere near reckoning with.
Rebounding interest rates, which rose by half a percentage point this week with plenty more to come, will punish the young, and others outside the golden property circle, for a boom that they have not been part of. After getting few of the benefits, they will get all of the pain.
One reason for this unfairness is that property prices are almost totally excluded from official inflation measures. The consumer price index, our gauge for inflation and therefore the trigger for countervailing interest rates, is calculated from a basket of consumables. Housing comprises 23 per cent, so you might think it would reflect a quarter-century’s hyperinflation. It doesn’t. The housing component of the CPI measures rent and the price of newly built dwellings, but not what Australians pour trillions into: existing properties.
Economists justify leaving this elephant out of the room by defining property as an asset, a transfer of wealth rather than consumption. Tracking the volatile ups and downs (or more precisely, the ups and ups) of house prices could distort the CPI. Interest rate rises that react to house price cycles might damage the rest of the economy. You can accept the argument while also sensing that those economists are missing the biggest factor affecting most Australians’ material decisions.
A first way in which this punishes the young is that the low interest rates we have had, in response to flat official inflation, has liberated existing home owners to borrow and buy more, driving up prices and blocking the way to those who were not already in the game.
Second, tens of thousands of home owners use their redraw facility for consumption. Drawing down from the mortgage, or eating the house, is a luxury for those watching their house prices go up, aggravates the relative disadvantage of those not able to do so, and contributes to the inflation that will now punish everyone equally, whether they own a house or not. Nice (lack of) work if you can get it.
There has been a lively debate over whether existing home prices should be included in the CPI. Gareth Aird, a senior economist at the Commonwealth Bank, has argued that the exclusion masks intergenerational inequity. For households that do not own a dwelling and aspire to purchase one, the CPI is a very poor measure of changes in the cost of living, he wrote in 2017, before the most recent pulse in the long property boom even started.
Australia flirted with including house prices in the CPI in the 1980s. Politicians were none too keen on recognising higher inflation, which would trigger interest rate rises and cost them votes. An American economic statistician, John Williams, coined a term for the concealment of home price rises: Pollyanna creep. The beneficiaries of Pollyanna creep, he said, were politicians who could tell voters the inflation rate was lower than it really was, and wealthy elites who could load up on cheap debt and deploy it in the financial markets.
Pollyanna creep entrenches intergenerational inequity even more when interest rates finally have to catch up. Only those who are living off their savings will benefit from rising rates … and guess what, that excludes the young too.
Australians are ahead of their policymakers in knowing this – hence the derision for Scott Morrison’s you’ve never had it so good line on the economy. The shift in voting last month was driven by a grand alliance between the young and those who care about the young – a vote for action on climate change and housing affordability.
Those who have benefited from a big undeserved Ponzi scheme now see their children reaching adulthood with diminishing prospects of joining in. The lifetime-renting mentality among under-30s is normal in parts of the world where economic mobility is minimal and wealth is deeply stratified across generations. House prices are turning 21st-century Australia into something more like an old-world country, where inheritance trumps all else and if you are born without, chances are that you will stay that way.
This is not the Australia that all those beneficiaries of unearned wealth grew up in, and not the Australia that I would like to leave behind.
Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. .