Take a Bow Generation Y

18 Aug 2014 9:58 AM -
Kerrisdale Stage 2 courtesy Kerrisdale Gardens
Kayaking Kerrisdale
Late winter afternoon walking the dog
Looking south to Mackay city

Gen Y - Confident, Well-Travelled and Financially Savvy Home Owners

Baby Boomers have fascinated academics and dominated the media landscape for fifty or sixty years. The boomers have rarely been out of the news up to this current phase of the intergenerational transfer of wealth.

It seems the baton may have already been passed with a lot less fanfare. It is a common perception that younger people are locked out of the property market, but research shows more young people than ever before seem to be buying property.

According to the Housing Affordability Sentiment Index (HASI) 2014, Generation Y, on average, are more positive than other Australians. An astonishing 53% of Gen Y are already property owners (up 5% from 2013), with 23% owning investment properties.

In fact HASI reports that 50% are buying property in the 25-29 year old age category compared with 37% for Gen X and 31% for Baby Boomers. They don’t seem to be stopping there either, 47% of those who own their own homes have ambitions to buy a second property in the next five years.  

Sounds like a generation who plans to control its financial destiny - but not at the expense of their overseas holiday they will hasten to tell you.

The rate of home ownership in Australia increased rapidly from around 40% in 1947 to over 70% in 1960 spawning a huge burst of construction. Mass communication via television introduced to Australia in 1956, rapidly changed our awareness of the rest of the world. Consumerism thrived. Our homes today reflect that trend. In spite of the fact that fewer people are now living in homes than in generations past, we are still building bigger homes. Perhaps there is a tipping point about to emerge.

According to a 2013 Westpac report, 87% of 18-34 year old females (versus 79% of men) list owning a home and paying it off as their top lifetime goal. Other top Gen Y lifetime goals from this report include: Travel the world 44%; having children 28%; and owning a car 11%.

In 2013, it was reported by McCrindle Research that Generation Y were the most positive of all Australia’s generations, with 2 in 3 (67%) believing the only way is up when thinking of the previous year compared to the coming year.

Gen Y is connected – they interact with each other and the wider world through channels unimaginable only a few years ago. And those digital skills include exploring financial strategies to become more educated, acquiring new skills to meet their goals.

Mortgage Interest rates are now at levels not seen since the 1950’s and 1960’s when the Boomers parents were in the market. It was not until 1970 that interest rates jumped from what had been a pretty stable 5% to 7% and then sky rocketed. It is only in the past year that home mortgage interest rates have fallen well below 6%. Now the four major banks have moved below the 5% mark on fixed home loan rates – an all-time low.

Residents of Mackay have an average age of around 35. That average resident has to find someone well into their 70’s and 80’s now to compare notes with, if they want to meet someone who enjoyed similar home loan rates.  At the end of the 1950s, the median house price was around $7,000–$8,000 at a time when average earnings were around $2,000 per year.

Let’s say you are looking at a new home now for around $450,000, about 60 times the price of a house at the end of the 1950’s. While some individuals in Mackay in 2014 do have an income 60 times that figure of 1950’s figure of $2,000, the vast majority of home buyers in 2014 have a dual income to support a home purchase. The vast majority of home buyers of the 1950’s and early 1960’s predominantly enjoyed only one income per household, rarely enjoyed family financial support or the odd Government grant.

A new home can certainly be purchased by a similar multiple of 60 times but checking with Gran, her new home rarely included two bathrooms, double garage, an outdoor entertaining area or a family room and there were very few mod cons included in the price. Best of all, plenty of windows provided the only air conditioning. Makes the current offerings sound comparatively quite competitive.

Looking more closely at this interesting window in the current mortgage rate environment, a reduction in fixed rates is often a signal the banks believe interest rates will fall further. However there does not seem to be any real belief out there in economist land that the Reserve Bank (RBA) is likely to drop interest rates even further. Speculating for a moment, if rates were to drop, with a cut of 0.25% being the most usual RBA trim, how many cuts would the RBA have to make to bring the average mortgage down to the latest offering? Perhaps three rate cuts would be needed to bring levels down to the discounted fixed loans.

The RBA has moved Cash rates one way or another 43 times (over a possible 161 meeting months) since 2000 and on 36 of those occasions the rate change was 0.25%. Barring any major crisis, the statistics would appear to be on the side of the borrower right now.

The new fixed deals may not be as good as they look but it is an encouraging sign that the banks are prepared to fight for customers. Traditionally, variable loans are among the most popular home loans in Australia due to their extra account features and repayment flexibility.

Canstar has done some analysis: Over the past twenty years there were 112 months where fixing was the correct choice and there were 111 months where staying variable was the correct choice showing that people choosing fixed only get it “right” 50% of the time.

In the months where fixing a mortgage proved, subsequently, to be the correct choice, the savings varied greatly -  up to $15,000 based on a loan amount of $300,000. However, when people got it wrong, where fixing proved to be a bad choice, that choice cost borrowers up to an additional $22,000 in interest costs.

Fixed loans will not suit everyone, but it may be a very good time to talk to your friendly bank manager or mortgage broker.

While housing prices have increased, the average mortgage size has been almost flat since 2010 - a unique situation, given since 1975 the value of the average Australian mortgage has risen by 26 per cent every three years. In addition, according to the RBA, our household level of debt stabilised since 2005. 

Joining the dots, there is one more dot to add to complete the circle. Both anecdotally and as confirmed by the Master Builders Association (MBA) regional manager Malcolm Hull, builder pencils have been sharpened as they meet the market. Quality local builders with access to quality land of varying sizes are the go to choice who, as they say in the classics, “..are shovel ready”.   

A highly driven, financially savvy group lives in our community, willing to make sacrifices in order to reach their property goals. The generation taking the property market by storm are not the grey hairs after all but Gen Y.

Mortgage rates are not only the lowest in several generations but mortgage levels have bucked the trend and remained flat over this current “teens” decade.

Just like folk in the 50’s and 60’s, some of us are now prepared to “go without” to achieve home ownership goals. Gen Y say they are willing to make sacrifices, with 66% saying they’d consider co-buying, 12% selling or considering selling valuables, and 23% considering – or already working – a second job.

When it comes to location, four out of 10 respondents in the HASI survey said they would not buy or build more than 10kms from their ideal location.

At Kerrisdale new houses are popping up like mushrooms in the recently launched Stage 2. Buyers in the current market are getting their houses up in record time and are able to pick the eyes out of the best locations in town.