CANBERRA: Owning your own home was once the great Australian dream but it has turned into a nightmare for young aspiring homeowners. Based on the evidence, government housing policy appears to be as follows: keep prices high at all costs, enslaving new buyers with obscene levels of debt for the benefit of banks and existing landowners. In a nutshell, this is called intergenerational taxation.
This is a social form of taxation in which there is a significant transfer of wealth from one generation of society to another. In Australia’s economic model, as house prices continue to soar, young homebuyers are forced to take on huge debts to acquire a home that turns to capital for the older seller of the home. Our banks and mortgage companies are writing the largest home loans in the world both relative to what a young homebuyer earns and in sum value. Putting all financial stability risks and issues aside, the more a bank lends to a new homebuyer the greater the profit a seller and lender will make. When irrational exuberance is rife, lenders increase the sum of debt they issue to young homebuyers and property investors alike. This essentially increases the rate of intergenerational taxation. And the greater the young are effectively taxed in this way, the richer older generations become.
However, when house prices fall hard, like they have already in some parts of Australia, the intergenerational taxation rate falls hard too – even to the point where the flow reverses and younger people can benefit. Take the Western Australian mining town of Karratha where a median-priced house back in 2011 would have cost about $850,000, or roughly seven times the median income of a household. Today the same house costs less than $300,000, which is roughly two-and-a-half times the median household income. So, back in 2011, the ballpark intergenerational tax rate from the young to the old in Karratha was a one-off payment roughly the equivalent of 400%-450% of the younger person’s annual income. Today, however, Karratha homeowners are now likely paying a one-off intergenerational tax rate of 15%-25% to younger Australians.
Karratha saw a remarkable transfer of wealth from young to old but now the reverse means an older cohort of Australians are left with a liability they may never repay in full. It serves as a warning for people who have bought into the Sydney and Melbourne housing markets in recent years and who are vulnerable to a fall in prices. To head off some of these problems, the government now wants to allow younger Australians to tap their super for deposits on homes, thereby increasing their tax transfer to the older generation. Behind the scenes is our banking system and our financial regulators. The Reserve Bank has been the primary facilitator of the intergenerational transfer by bringing interest rates down to a record low and promising a safety net for banks. So the question a young homebuyer must ask themselves is why have the government, mortgage lenders, landowners and the RBA built a wealth transfer system that leaves the aspiring young homebuyer as the most leveraged in the world? The answer to this question is very simple. The reality is a very small number of powerful lobby groups in Canberra have a hundred times more influence on shaping housing policy than young people. In other words, the voice of our youth is unfortunately all but irrelevant and ignored.
