Australian house prices: A sharp change means Australians are deeply in debt in retirement

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Many things have changed in Australia, especially in real estate. Few things sum up how difficult things are getting more than this comparison of 20 years.

At the turn of the new millennium, Australia apparently had it all.

The economy was booming – and households shared in the nation’s good fortune as they watched their wage bills grow rapidly.

In short, it was a pretty good time to be an Aussie.

Thinking back to that time, in some ways it’s barely recognizable compared to how things have changed over the past two decades. Perhaps one of the biggest and most noticeable changes that has taken place is the rapid increase in the cost of housing.

To explore how this has changed from the perspective of real-world households, we’ll look at the median age of the first home buyer across more than two decades of data.

A changing landscape for borrowers

According to figures from research firm Digital Finance Analytics, when calendars hit the 2000s – back when radio was airing the year’s No. 1 hit, NSYNC’s Goodbye goodbye – the median age of first-time buyers in the country was 24.5. At the time, mortgages were generally contracted for 20 years.

Even if this hypothetical median household encountered a few major hurdles down the road in terms of illness, family issues, or financial hardship, they could generally work their way out of their mortgage by age 50.

This is naturally a boon not only to the wealth of the individual household, but also to the economy at large. With the household no longer shelling out for mortgage payments each month, these funds could now be spent on goods and services in all sorts of businesses.

Fast forward to 2022 and things have changed drastically. The median age of a first-time homebuyer nationwide has increased by a full decade – to 34.5. With house prices now significantly higher relative to household incomes, loan terms have been extended, with 30-year mortgages now commonplace.

On paper, that will let today’s first-time homebuyers pay off their loans until they reach what was once the finish line of working life, age 65.

However, results can vary widely depending on the state a first-time buyer lives in.

For example, in South Australia, the median age of a first home buyer is 33.6, compared to 36.3 in New South Wales.

Perhaps unsurprisingly, the more expensive states of Victoria and NSW have the highest median ages of first home buyers. Meanwhile, South Australia and Queensland have the lowest rates.

Difficult long-term consequences

Although we can now think of the early 2000s as a bygone golden era of affordable living and strong growth in real (inflation-adjusted) household income, even these conditions eventually led to significant changes in the amount of the debt of retired Australians.

According to a 2017 analysis by Rachel Ong ViforJ, a professor at Curtin University, and Gavin Wood, a professor at RMIT University, between 1990 and 2015, the average mortgage debt-to-income ratio of Australians over 65 rose from 72% to 152%.

The proportion of older households with debt has also increased significantly, with 7% of homeowner households over 65 having mortgage debt in 1990, up from 12% in 2015.

For households aged 55 to 64, the increase was even more pronounced, with the proportion of homeowners with mortgage debt rising from 14% in 1990 to 47% in 2015.

The vast majority of these households would have bought their homes for a fraction of the current price and generally on much shorter loan terms. Yet, despite these tailwinds, a growing proportion of households were already taking on mortgage debt in retirement.

It’s not hard to imagine a greater proportion of today’s first-time buyers carrying mortgage debt in retirement, given that their loans are typically much larger and the median buyer has far more a decade less to repay his loan before retirement.

According to a recent Channel 7 report, some in the finance world are pushing the idea of ​​40-year mortgages. Since the median age of first-time buyers is now 34.5, if a buyer could take out a loan for 40 years, they would still be paying it off at age 74.

Perspectives

The past three years have brought all sorts of surprises to Australian households – first the pandemic and now the return of the decade high inflation. So any sort of outlook for the future is going to be clouded by extremely high levels of uncertainty.

However, based on the trends we have seen in the past and the growing size of mortgages, one could argue that more and more households are facing what amounts to almost a lifetime of debt. That’s a far cry from the households that bought homes at the turn of the millennium, many of whom are mortgage-free and free to spend their income as they see fit.

Ultimately, over time, this will have consequences for the economy and consumer spending, as households will spend years more paying off their mortgages and making the necessary sacrifices to do so.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

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