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Have you bought a house yet?

· Catriona McNaughton,Investment,Housing,Analysis

Western countries, including Australia, have regularly prioritised home ownership with parents and other trusted elders often asking younger generations “Have you bought a house yet?” and governments incentivising it through tax relief and first homeowner grants. This philosophy is often based on the safety of housing investment, the relative simplicity of the concept and the government revenue derived from the property market. But is also often blind to the extreme hurdles and growing risks Millennials face in an environment very different to the post-war property bonanza and overshadows a range of other key investment decisions that governments, and parents, should be supporting younger generations to achieve.

Historically, the relative stability of property markets alongside the dream of home ownership has led to property becoming a staple of household investment portfolios. But following the sharp rise in housing prices in the mid-1990s home ownership trends began changing. The Australian Institute of Health and Welfare highlights these changes, showing the rate of home ownership in the 30-34 year old age group dropping from 64% in 1971 to 50% in 2016, and a similar drop from 50% to 37% for the 25-29 year old group[1]. These changes and their relationship to the question of accessibility and affordability, particularly for younger and lower income households, led to a series of Senate inquiries. In their submission to one of the inquiries in 2014, the Reserve Bank of Australia highlighted that “Australian housing prices increased by about two-thirds relative to income in the decade or so up to around the end of 2003”[2]. This growing price to income ratio has created a barrier for young investors, trapped in a perpetual rent/savings environment. But interestingly commentary around the pathway to home ownership still focuses heavily on savings, and a home as the first major investment.

In a 2015 report by the ASX that assessed share ownership, they identified the age at which share ownership normalises (above 33% the overall incidence of direct share market ownership) is around 35 years old[3]. This is comparable as the mean age at which Australians are buying their first home[4] which is surprising given the relative initial investment costs and the risks to securing the investment. The entry cost of the property market is high, meaning most first home buyers do so with a mortgage, and it is also an incredibly restricted portfolio. By comparison, share market investment can provide an entry point to achieve wealth creation without debt across a diversified portfolio. The flexibility and liquidity of the share market should appeal to Millennials struggling to get their foot on the property ladder, so why are there such low investment rates in younger people?

In assessing the barriers faced by potential investors, the ASX report identified a ‘Keen segment’.

“The attitudes of the Keen segment (21% or 2.52 million people) demonstrate the opportunity that exists to bring new investors to the market, given the right support. They expressed an eagerness to learn and wanted to be involved in the market but they also acknowledged that they needed support and valued the role of advice. Demographically Keens were young, with 55% under the age of 35, and 50% were female. In general, younger non-investors preferred to consult people they know, as well as expert advisers. They seemed to want mentoring.”[5]

This also highlights a broader question of financial literacy. In 2016, only 42% of those surveyed in Melbourne University’s HILDA study could correctly answer five financial literacy questions, with significant differences shown across age group and gender (older and male respondents on average performing better than younger and female respondents)[6]. This builds on a growing body of research demonstrating low levels of financial literacy, susceptibility to financial scams, uncertainty in retirement planning and confusion with longer-term complex finances in Australia[7].

While Government has committed to improving financial literacy, the relative investment is low and outcomes unclear. In 2005 the Government established the Financial Literacy Foundation, which went on to develop the Understanding Money Website (a precursor to MoneySmart) and Financial Literacy Resources Australia, before being incorporated into the Australian Securities and Investments Commission in 2008. To counteract the ongoing low levels of financial literacy, government has tended to focus on compulsory and incentivised investment direction including the Superannuation Guarantee, First Home Buyers Scheme, and other incentives such as the Capital Gains Tax exemptions as a way of encouraging future wealth creation, all of which complicate the financial system and none of which solve the underlying problem.

Moreover, these programs do very little to assist younger people to kick-start their wealth creation pathway, for example to reach their first $50,000, or to understand the risk-reward dynamics of their life-long investment portfolio. In addition to significant investment in financial literacy programs as part of the school curriculum, Government needs to consider an entirely new approach to supporting wealth creation for this generation. This includes encouraging housing supply that doesn’t solely focus on infrastructure to support development further from city centres, but also requires innovative strategy to encourage the ‘Keen segment’ of investors into the market.

[1] Australian Institute of Health and Welfare 2019 “Home ownership and housing tenure” Snapshot 11 Sep 2019 https://www.aihw.gov.au/reports/australias-welfare/home-ownership-and-housing-tenure

[2] Reserve Bank of Australia 2014 “Submission to the Inquiry into Affordable Housing” Senate Economics References Committee https://www.rba.gov.au/publications/submissions/housing-and-housing-finance/inquiry-affordable-housing/pdf/inquiry-affordable-housing.pdf

[3] ASX Limited 2015 “The Australian Share Ownership Study” https://www.asx.com.au/documents/resources/australian-share-ownership-study-2014.pdf

[4] Australian Housing and Urban Research Institute “When are Australians buying their first home?” AHURI Brief https://www.ahuri.edu.au/policy/ahuri-briefs/when-are-australians-buying-their-first-home

[5] ASX Limited 2015 “The Australian Share Ownership Study” https://www.asx.com.au/documents/resources/australian-share-ownership-study-2014.pdf

[6] Melbourne Institute: Applied Economic & Social Research 2018 “The Household, Income and Labour Dynamics in Australia Survey: Selected Findings from Waves 1 to 16” https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0005/2839919/2018-HILDA-SR-for-web.pdf

[7] Taylor, Sharon and Wagland, Suzanne, 2011 “Financial Literacy: A Review of Government Policy and

Initiatives” https://ro.uow.edu.au/cgi/viewcontent.cgi?article=1170&context=aabfj

Catriona McNaughton is Manager - Communications at FPL Advisory.

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.

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