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What happens when a generation can't afford to buy a home?

UNSW Sydney

A generation locked out of property ownership could face greater financial pressure in retirement, reduced spending power and fewer opportunities to build wealth, says a UNSW economist.

For generations of Australians, buying a home was seen as the foundation of financial security and a pathway to building wealth. For many younger Australians, that path is becoming increasingly difficult to follow as house prices rise faster than incomes.

Scientia Professor Richard Holden, UNSW Vice-Chancellor’s Professor and Chief Societal Economist, said the growing gap between people who owned property and those trying to build wealth from scratch was affecting more than just the housing market.

He said people who felt locked out of their financial future may be less likely to invest in themselves, their communities or the wider economy. 

“If people think that they’re never going to own a home, never going to be able to build wealth, it’s a very human, natural reaction to say, ‘Well, I may as well enjoy myself.’ 

“If they feel that they don’t have a stake in their future, then that’s a very damaging thing. We need to be really concerned about that,” Prof. Holden said on a recent episode of The Business Of podcast.

How to build wealth from scratch

For people starting without inherited wealth or property, Prof. Holden said, the most reliable investment was in developing skills that remain valuable as the economy changes.

“Invest in yourself, invest in your own skills,” he said. “If you’re more on the entrepreneurial side, invest in yourself, but invest in having a great idea and putting your energy into building that.”

For those planning to work for an employer, Prof. Holden said it was important to keep adapting. 

“Try and make sure your skills are the most valuable, re-tool those skills over the course of your lifetime,” he said. “Those can’t be taken away from you.”

Prof. Holden said saving remained important, even if changes to the tax system made it less attractive than it once was.

“Just because the tax rate’s higher now doesn’t mean that saving is not a good idea,” he said. “It just means it’s a little bit less attractive than it used to be. So don’t lose sight of the broader goal.”

Why home ownership is becoming harder

Younger Australians are not necessarily worse off than their parents when their total lifetime consumption is considered. However, Prof. Holden said a lack of affordable housing and delayed life milestones had left many younger people feeling behind. 

“Life has become a little more delayed than it used to be,” Prof. Holden said. “People are often taking longer in education, and people are delaying marriage or household formation to later in life.”

This can make comparisons with previous generations misleading. “People sort of look at what maybe their parents’ generation, where they were up to when they were 30 years old, and say, ‘But I’m 30, I’m not there,’” he said. “That’s not necessarily a bad thing, and it’s to be expected. 

“But I think the compounding of seeming to be behind where my parents’ generation was, and housing is really unaffordable, that double whammy makes people understandably feel how they do,” Prof. Holden said.

For Prof. Holden, the problem is not simply that younger Australians feel behind. Housing has become objectively difficult to afford when prices are measured against local incomes. 

“If you look at house prices compared with the incomes of people in the middle of the income distribution, Sydney is the second-most expensive city in the world,” he said, behind Hong Kong. Melbourne ranks fourth and Adelaide ninth.

The scale of Sydney’s housing market is even more striking. Prof. Holden said someone earning more than $190,000 a year, the top income bracket, would not even be able to afford the median house if they spent all their income on a mortgage. 

“You wouldn’t be able to afford it, and no one would give you [a loan],” he said. “So that gives you a sense of how hard it is.”

Prof. Holden said the long-term increase in property prices could not be separated from the amount Australians had been able to borrow. 

“House prices have grown a lot over the last 30-odd years, or 40 years, and incomes haven’t grown nearly as much,” he said.

Banking deregulation, changes to international capital rules and lower interest rates enabled people to borrow more. “Beginning in the mid-1980s and on through to the 1990s, there was this massive explosion in the amount that people could borrow, and they put a lot of that into housing,” said Prof. Holden. 

The long-term consequences of not being able to build wealth

Prof. Holden said the wealth gap became particularly significant in retirement, when people who did not own a home may continue paying rent without the benefit of a mortgage-free asset. 

“If you don’t own your own house and all you’ve got is the age pension, that’s going to be tough - borderline impossible,” he said.

Australia’s retirement system assumes that people will own their home by the time they stop working, said Prof. Holden.  

“If people are going to be paying rent [long-term], they’re going to need a lot more in super than they think,” Prof. Holden said.

For those who do manage to buy a home, the financial pressure does not necessarily end. Large mortgage repayments can reduce the money available for other spending during their working lives. 

“People are spending a lot more of their money on housing, on their mortgage, and not consuming as much on other things,” Prof. Holden said. “They’ve got less disposable income for that, and that makes that harder.”

Prof. Holden said the effects extended beyond household budgets. If people felt they had no stake in their financial future, they may not invest in “themselves, their communities, the country”. 

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