It's no wonder the young hate Boomers like me

As I get older, more parts of my body are giving me gyp and I spend more of my life seeing doctors, but the people I don’t envy are the young. They may be fit and keen, but everywhere they look they see problems.

The big advantage of capitalism is supposed to be that it makes each generation better off than the last. But that’s breaking down before our eyes. The really harmful problem we’re leaving them is climate change, of course, but there’s much more than that.

They’re better educated than ever but, for many, it doesn’t seem to get them a secure, decently paid job. Even so, they leave education owing big debts to the government.

But, coming well behind climate change, the biggest disservice the older generation has done to them is to let the price of a home keep reaching for the sky.

We’re now at the point where each successive age group contains an ever-lower proportion of people who’ve managed to buy the home they live in.

In contrast, the aged have never had it better. The only thing they have to fear – and the young have to look forward to – is still needing to rent privately in retirement.

We’ve turned housing into Lotto. If you manage to win, they shower you in wealth. If you don’t win, you get screwed. Renters have few rights because, as we all know, it’s just a temporary state for the young.

And then the Baby Boomers (like me) wonder why the young seem to hate them. It’s not true that all Baby Boomers are rolling in it. Some of them don’t even own their own home. But most of them (like me) were able to buy early in their lives, when first homes were affordable. Since then, they’ve just sat back in delighted amazement as their wealth has multiplied.

Of course, if there’s anything wrong with the way the world’s run, it wasn’t anything I did, it was those terrible pollies. Yeah, nah.

Since older home owners have always far out-numbered the young would-be home owners, the politicians have always run the housing game to favour those who love seeing property prices rise – and, now you mention it, wouldn’t mind buying another house as an investment.

At present, it’s easy to conclude the big problem with housing affordability is rising interest rates and so blame it all on the Reserve Bank boss Dr Philip Lowe. But, as I’ve written elsewhere, although it’s reasonable to ask whether putting interest rates up and down is a sensible and fair way to manage the economy, that’s a separate issue.

Home loans take two to tango: how much you have to borrow and the interest rate on the loan. The interest rate cycles up and down around a relatively stable average, whereas the amount you need to borrow has gone up and up, decade after decade.

True, house prices are falling at present, but this is just returning them to where they were before they took off during the pandemic. It’s a safe bet that, once they’ve finished falling, they’ll resume their upward climb.

This is why oldies are wrong to scoff at young people complaining about mortgage interest rates of 5 per cent. “In my day, I had to pay 17 per cent!” Yes, you did – for a year or so in the early 1990s, when the amount you had to borrow was much less.

What’s true is that, right now, it’s mainly younger people who borrowed huge sums in the past few years who’re really feeling the pain.

But the real question is why house prices have risen so far for so long. They’ve risen much faster than incomes. The Grattan Institute calculates that whereas typical house prices used to be about four times incomes, now they’re more than eight times – and even more in Melbourne and Sydney.

But why? Not because of anything the Reserve Bank has done. Nor so much because we’ve failed to build enough additional houses and units to accommodate the growth in the population.

More because our tax and social security rules have made home ownership a highly attractive, government-favoured form of investment, not just a place you can call your own and not be chucked out of as long you keep up the payments. People who buy investment properties out-compete would-be first home owners, bidding up the price.

But also because there’s more competition to buy homes in particularly desirable areas. Spots near the beach or the river, for instance, but also places near where the jobs are.

People have been crowding into the big cities, trying to get close to the CBD with all its well-paid office jobs, but the older home owners fight hard to discourage governments from making room for younger newcomers. “It’s so ugly.”

And the bank of mum and dad (yes, I’ve done it) is helping prices stay high, while widening the divide between those young people with well-placed parents and those without.

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Working from home takes us back to the future

If there’s one good thing to come from this horrible year, surely it’s the breakthrough on WFH – working from home. This wonderful new idea – made possible only by the wonders of the internet – may have come by force, but for many of us it may be here to stay.

If so, it will require a lot of changes around the place, and not just in the attitudes and practices of bosses and workers. With a marked decline in commuting – surely the greatest benefit from the revolution – transport planning authorities will have to rethink their plans for more expressways and metro transport systems.

If we’re talking about fewer people coming into the central business district and more staying at home in the suburbs, over time this will mean a big shift in the relative prices of real estate. For both businesses and families, CBD land prices and rents will decline relative to prices and rents in the suburbs.

In big cities like Melbourne and Sydney, as so many jobs have moved from the suburbs to office towers in the CBD and nearby areas, the dominant trend in real estate has gone from position, position, position to proximity, proximity, proximity. Everyone would prefer to live closer to the centre.

If you measure the rise in house prices over the years, you find the closer homes are to the GPO, the more they’ve risen, with prices in outer suburbs having risen least.

But if WFH becomes lasting and widespread, that decades-long trend could be reversed. If you don’t have to spend so much time commuting, why not live further out, where bigger and better homes are more affordable and there’s more open space?

Maybe apartment living will become less attractive compared to living in a detached house with a garden, with a corresponding shift in relative prices. And if we’re going to be working at home as a regular thing, maybe we need an extra bedroom to use as a study.

It’s interesting to contemplate. But before we get too carried away, let’s remember one thing: in human history, there’s nothing new about working from home. Indeed, when you think about it you realise humans have spent far more centuries working at home than not.

We’ve been working from home – not having a factory or office to go to – since we were hunters and gatherers. That was all the millennia before the beginning of farming about 10,000 years ago.

In all the years before the start of the Industrial Revolution in Britain in the 1760s, most people earned their living from farming, and farming was done next to – and sometimes inside – the hovels of peasant workers or, in less feudal times, the homesteads of farmers.

You know that in Europe and other cold climes, families lived with their farm animals during winter. Much work would have been done in nearby sheds.

In the Middle Ages, most tradespeople worked at home. Blacksmiths, carpenters, leather workers, bakers, seamstresses, shoemakers, potters, weavers and ale brewers made their goods in their homes and sold them from their homes.

This was work suitable for women as well as men, and it could be combined with childcare and other, income-earning farm work.

In the early days of capitalism, from the 1600s to until well into the Industrial Revolution, much use was made of the “putting-out” system, as The Economist magazine describes in a recent issue.

“Workers would collect raw materials, and sometimes equipment, from a central depot. They would return home and make the goods for a few days, before giving back the finished articles and getting paid,” it says.

“Workers were independent contractors: they were paid by the piece, not by the hour, and they had little if any guarantee of work week to week.”

Is this ringing any bells?

Being economists, the magazine notes that when Adam Smith wrote The Wealth of Nations, in 1776, it was perfectly common to work from home. Smith famously described the operation of the division of labour in pin-making – not in a dark satanic mill but a “small manufactory” of perhaps 10 people, which could well have been attached to someone’s house.

Eventually, however, the putting-out system gave way to full-on manufacturing in factories – despite the resistance of the machine-smashing Luddites who preferred the old ways.

The move to factories was an inevitable consequence of the development of bigger and better machines in the unending pursuit of economies of scale. Workers moved from the farm to the factory and then, as technological advance continued, from highly automated factories to city offices and, eventually, sitting at a desk staring at a screen.

It’s economic development and the pursuit of ever-greater material prosperity that opened the geographic divide between home and work. Which is not to say that further technological change – including the advent of Slack and Zoom – can’t make it possible to bring them back together for many, though obviously not all, workers. Provided, of course, that’s what workers and, more significantly, bosses see as being to their advantage.

Here, too, it’s worth remembering a bit of history. The Economist notes that, according to some economic historians, workers were exploited under the putting-out system. Those who owned the machines and raw materials enjoyed enormous power over those whose labour they used.

It was difficult for workers spread across the countryside to team up against the bosses and their take-it-or-leave-it offers. Crammed into a big factory, however, workers could more easily join together to ask for higher wages. Trade unions started to grow from the 1850s onwards.

Happy speculation aside, there’s no certainty how much working from home will take on. If it does, there’s a risk that will be because bosses see it as a new way to cut costs. That really would be turning the clock back.

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House, marriage and children - in their own sweet time

The media leap on any suggestion of social change. At present there's talk of younger people being happy to keep renting rather than buy their own homes. Before that there was talk of career women not wanting children. And before that, we kept hearing about young people not bothering to get married, even after the kids had started arriving.

I guess there's some truth in all these stories. Perhaps the truth is that, whereas in times past just about everybody conformed to expected behaviour, these days a minority rebels. Or perhaps it's just that these days more young adults are turning to the conventional response later, rather than not at all.

But whatever the explanation, don't let an excitable media convince you the world is changing beyond recognition. Human nature's a bit more resistant. Things change, but not dramatically.

According to a new report from social researchers Ipsos Mackay, almost everyone in their 20s to mid-30s who participated in their group discussions wanted the "trifecta" of marriage, house and children. What's changed is they're a lot more flexible about the order in which they come and how long they take.

Young adults still want to see the world before they settle down. Perhaps these days it's easier for more of them to do so and they're inclined to make several overseas visits rather than just one extended working holiday. (Sometimes I wonder whether declining oil supply and concerns about greenhouse gas emissions will one day cause us to look back with longing on a golden age of international travel.)

One change is that, when young adults start to settle down, buying a property is often the highest priority. They're "keen to get started for fear of missing out," according to the report. So much so that some of them, unable to afford their own home, nonetheless seek a foothold in the market by buying an apartment and renting it out.

The fear of missing out - of delaying until the point where prices become unaffordable - is the very mentality that keeps prices rising, of course. It's a self-fulfilling prophecy.

The surprising thing is many years of strongly rising house prices seem to have done so little to dull the home-owning ardour of the next generation. They repeat their parents' conviction that rent is "dead money" and mortgage payments are no higher than rent (not really true).

They see property as a good investment and - in what may be an advance on their parents - a means of forced saving. Just so. Until the advent of compulsory superannuation, it had long been the case the main way Australians saved was to borrow a huge sum on their mortgage and spend the next 25 years paying it back.

Even where people continue to live in that home in retirement rather than trading down to a smaller and cheaper one, owning your home makes it a lot easier to live on the age pension.

Why is the next generation so keen to own the roof over its head? Because it creates "a sense of security and pride in ownership".

Just so. We all have an urge to own. I have a holiday house I love, but only rent. It took my head years to convince my heart I was getting the best of all worlds since the place was almost always available when I wanted it and I had no responsibility for the upkeep of the place. If the grass needs cutting when I roll up for a break, I experience not the slightest twinge of conscience.

The report says young people "invariably" rely on support from family. That's something all parents need to understand. The rise in house prices represents a transfer of wealth from the younger generation to the older. At the level of the individual, that wealth needs to be recycled from old to young if the young aren't to be dispossessed.

At the collective level, should sufficient recycling fail to occur, house prices would slip (which might be no bad thing). In the end, this generation sells its homes to the next. If the next generation can't stump up the money, prices will fall until they can. The remarkable thing is, so great is our continuing desire to own our homes that young couples keep finding the money from somewhere. One way they do it is by allowing housing costs to take up a bigger share of their weekly budgets than in earlier times. Another way is for wives to keep working and delay the start of their families.

There's the rub. According to the report, most young people accept the impossibility of buying property on one income. In theory, having two incomes makes it possible for couples to enjoy a much higher standard of living. In practice, the presence of two incomes, with their greater purchasing power, has simply bid up the price of houses. What began as an advantage to those couples able to command two incomes has become a disadvantage to those unable or unwilling to have the wife go out to work.

It seems to remain the case that most young people marry - eventually. What's changed is the variability in when in the process of acquiring a house and children marriage occurs.

Big weddings are fashionable and seem to have become more expensive - with the average cost said to exceed $35,000 - but the couple is now likely to pick up more of the tab. With prices like that, it's not hard to see it postponed to a more financially convenient time.

So marriage is no longer a major point of transition for many young people. On the other hand, the young adults covered in the report found having kids radically transformed their lifestyle. Now who among us oldies would ever have imaged that?

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At last a strategy that will ease the housing shortage

It has taken Australians a long time to twig that rapidly rising house prices aren't as good as they sound. For ages home owners happily imagined higher prices made them richer. But richer in what sense?

For a start, you can't get your hands on that wealth unless you're prepared to trade down to a smaller or cheaper place. You can borrow against it, but what's so great about that? You still have to pay interest - and pay back the principal. Should you wish to trade up to a bigger or better place, the price has gone up for you as much as for anyone else. Exactly how are you better off?

Politicians will never tell you this, but economists will: a nation can't make itself richer by contriving to charge itself more for its housing.

All that really happens when house prices rise is a redistribution of wealth. People who own their home are better off at the expense of people who don't. (Even if those people have never aspired to own their home, they'll end up paying higher rent.)

For the most part what we're talking about is a transfer of wealth between the generations. The older generation gains at the expense of the rising generation. Which is fine if you don't have kids. If you do, however, you have to wonder how on earth they'll be able to afford a place of their own. One way they'll manage it - provided there aren't too many of them - is via a generous subsidy from their property-rich oldies.

Oh. See what I mean about in what sense are you richer? As this realisation has dawned, most of us have stopped seeing rising house prices as a great boon (and the pollies have stopped boasting about it).

Since 1995 house prices across Australia have risen about 230 per cent faster than the rate of inflation. That's a real increase averaging about 6 per cent a year (whereas the conventional wisdom was that house prices rose by only 1 or 2 per cent a year in real terms).

Australian house prices are now high even by the standards of other developed countries. Up until the middle of the noughties, the main reason for the increase was the marked fall in interest rates following our return to low inflation.

This allowed people to borrow a lot more for the same level of monthly mortgage payments, so a lot of people decided it was a good time to trade up to a bigger house in a better suburb. Trouble is, when so many people decide that at the same time, all they succeed in doing is bidding up the prices of the limited supply of better-located houses they're fighting over.

Since the middle of the noughties, however, the main cause of house-price rises has changed. High immigration has caused the population to grow faster than the number of homes. As ever when demand outstrips supply, prices rise.

Several years of this have left us with a chronic and growing shortage of dwellings. We seem to have trouble building more than about 155,000 homes a year. Allow for the homes we pull down each year, and for the proportion of holiday homes built, and this shrinks to about 133,000 a year.

According to the estimates of the federal government's National Housing Supply Council, at June last year we had a nationwide shortage of 178,000 dwellings. It estimates by the end of this month this will have increased to 202,000 (but don't be surprised if it's higher). NSW accounts for almost a third of the shortage.

With the business community and the Rudd government keen to maintain high levels of immigration, you can see why the housing shortage is becoming a matter of great concern.

The problem seems to be blockages in state and local government planning and approval processes, which limit the amount of new land being made available and built on. A related problem is the reluctance of many councils (under pressure from their voters) to approve medium- and high-density "infill".

NSW in particular has had a problem with exorbitant developer charges, which made newly released land unaffordable to young couples.

But here's the good news: yesterday's state budget introduces an impressive "comprehensive housing supply strategy" that looks like it really will increase the supply of new homes coming on to the market and thus limit the upward pressure on house prices.

In 2008 the government reduced its own "state infrastructure charges" on developers from about $46,000 to $11,000 a lot. Now it's imposed a cap of $20,000 a lot on local council charges, which at present can be as high as $50,000 or $60,000 a lot.

All council developer charges will have to be approved by the NSW Independent Pricing and Regulatory Tribunal, which will only permit passing on of infrastructure costs essential to the development sites, not general community betterment projects. This suggests some councils' charges may be lower than the $20,000 cap.

One reason councils have been so savage in imposing developer charges is the long-standing practice of pegging their rate increases to the consumer price index, which has left them with insufficient funds to finance needed capital works.

Now the rate-pegging process is to be handed over to the tribunal, which will develop a more realistic local government cost index and consider councils' requests for higher rate increases.

The government will spend $44 million over two years to speed up the planning and approval process and ensure more weight is given to economic concerns. Almost half that will reward councils that process more development approvals. Much of the rest will allow the Department of Planning to accelerate its implementation of reforms.

If ever there was an area where NSW needed to lift its game, this is it. And now, remarkably, it has.

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