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Mortgage costs up 130% in 3 decades: Per Capita

Home ownership costs jumped by 130 per cent over two generations, with Gen X spending a quarter of their income servicing their loan, according to research.

A discussion paper by think tank Per Capita has revealed a significant spike in the lifetime expenditure of the median mortgage over three decades, and the consequent decline in the spending capacity of average Australian households.

The paper, titled Generation Stressed: House prices and the cost of living in the 21st century, found that for a Silent Generation family buying property in 1970, the average repayment cost over the course of the mortgage was 11.2 per cent of their gross income. This increased to 19.5 per cent of gross income for a Baby Boomer family buying a home in 1985.

A Generation X family who purchased a home in 2000 and have around nine years remaining on their mortgage will spend 25.5 per cent of their gross income on servicing their mortgage debt.

This represents a 130 per cent increase in the lifetime cost of owning a home over 30 years.


For the Generation X family, low wage and inflation growth have meant that their debt would decline at a significantly slower rate in real terms compared with previous generations, the paper said.

The researchers have estimated that the Generation X family is paying $1,425 per month on their mortgages in 2021.

However, if they were on the same repayment trajectory as the Baby Boomer family, their monthly bill would be $910, while this would reduce to $440 a month if they were on the Silent Generation trajectory.

Report author Matt Lloyd Cape said: “For the individual family, this is a huge loss of income – almost $1,000 a month – that would be better directed towards education, health or other living expenses.

“For the nation, it represents a significant constraint on household consumption, which accounts for more than half of Australia’s economic activity.”

The household debt of the Silent Generation family was worth around 3.7 years of median full-time male annual earnings in the first year of the mortgage, but after five years, over half of the debt had been inflated away to just 1.8 times annual earnings.

However, three decades later, the initial mortgage debt taken on by the Generation X family equated to 5.6 times annual earnings, and continued to remain at 4.1 times after years.

Low rates a monetary policy ‘failure’

The paper also noted that it may seem counterintuitive that a home is considerably more unaffordable for current mortgagees given that Baby Boomer families had to pay double-digit interest rates in eight of the first 11 years of their mortgage, while the Generation X family have seen low interest rates since the GFC.

However, it argued that assessing housing affordability based solely on interest paid is a “crude” measure.

“Low interest rates may appear to benefit households, but they contribute to spiralling house prices and reflect a failure of monetary policy to balance the economy over successive decades in order to effectively keep critical asset prices in line with wage growth,” the paper said.

The discussion paper has argued that when looking at changes to mortgage affordability between generations, the role of inflation and wage growth would need to play a central role.

It said that there is a “significant problem” with how inflation is measured, since home purchase costs are not effectively included.

The paper has argued that by treating the cost of buying a home (the largest cost shouldered by households) as an asset investment instead of as a daily expense, the consumer price index (CPI) fails to adequately account for the increase in the cost of living for mortgagee households over the last 50 years.

“If our social welfare model is predicated on mass home ownership, factoring the total cost of a home purchase must be incorporated into cost-of-living measures,” the paper said.

“The CPI is a classic ‘least worst’ option for measuring inflation, and many of the compilers of the CPI at the ABS (Australian Bureau of Statistics) admit to some of its flaws. However, failing to properly incorporate the single largest cost for most Australians – that of buying a home – requires that the measure be adjusted or complemented by another measure.”

RBA’s role in house price sustainability

In addition, the paper has argued that monetary policy choices have “higher distributional effects” than is typically acknowledged.

It said the Reserve Bank of Australia (RBA) could consider house price sustainability in its policymaking to reduce the house price bubble (similar to the Reserve Bank of New Zealand), and raise deposit requirements, which it said would reduce some of the speculation in the market, since investors tend to be far more leveraged than owner-occupiers.

Further, it said that the federal government could scrap tax incentives for investors, particularly the capital gains tax discount, and remove or limit negative gearing, while state governments could focus on rezoning land for residential use to hasten home building.

“But given the inability of the RBA to reach its inflation target over the past eight years, perhaps it is time to ask why inflation targeting is its core mandate,” the paper said.

“Structural underemployment and stagnant productivity, leading to anaemic wage growth, have been far more harmful to economic outcomes for middle- and low-income earners than has inflation.”

The paper suggested that genuine full employment with sufficient hours of work to provide adequate income to maintain living standards is a solution to the current wages and productivity crisis”, which would require monetary and fiscal policy to operate together, with greater democratic control of monetary policy.

“Full employment, properly managed, would bring about steady inflation and wage growth which would help with the ticket price affordability of houses, and the ongoing cost of mortgage repayments,” the paper said.

Commenting on the discussion paper, Mr Lloyd-Cape said: “We hope that this paper will contribute to a renewed focus on how low inflation and wage growth are contributing to intergenerational inequality, in this instance through the housing market.”

[Related: Mortgage stress declined in May: Roy Morgan]

Mortgage costs up 130% in 3 decades: Per Capita
Mortgage costs up 130% in 3 decades: Per Capita

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