Last week BNZ chief economist Tony Alexander was in the paper with some stern words for young people trying to find somewhere to live in a city that doesn’t have enough housing to go around. As reported by Susan Edmunds:
Think your parents got an unfairly great deal when they bought their house for $40,000 – or thereabouts – 30 or 40 years ago? Not so fast.
BNZ chief economist Tony Alexander says young people priced out of the market are wrong to point the finger at retirees. […]
“The cost of borrowing to purchase a property has plummeted and because of this structural jump in demand for property prices have lifted. Those Baby Boomers people are dumping on paid mortgage rates in the late-1980s around 20 per cent,” he said.
Older people were turning to property investments because they did not have the stomach for sharemarket volatility, he said. That also drove up prices. Accelerated population growth and the spending power of double-income households played a part, too.
He said young people wanting a house should buy a “dunger or even a meth house to strip, and do it up”. “Basically be prepared to do what the Boomers did in many instances,” he said.
“Start out in a desolate new suburb of clay soil far from work, do up a piece of shite, or build and live in what will become your garage whilst building the rest of the house around you in the following few years.
“And how to finance it? Go to cafes and spend as much on lattes, muffins, frappes, wraps, etc. as often as the Baby Boomers did,” he said.
“Hire as many gardeners, landscape designers, decoration consultants, plumbers, feng shui consultants, window washers, dog walkers, dog washers, cat whisperers and general handymen as they did.
“And hope to hell that when you come to retire you don’t sit looking at your bank statement shaking your head because when you had a mortgage the bank charged you 20 per cent but now that you have term deposits you’re only getting 3.5 per cent all whilst listening to people saying you and your profligate ways are the problem.”
Whoah. There’s a lot in here, and most of it is flat wrong.
For a start, Alexander’s contention that young people are spending too much on personal services compared to their prudent, virtuous elders is contradicted by the evidence. Set aside the fact that young people who are renting and unable to find secure, long-term homes generally don’t bother to hire a landscape designer or decoration consultant. Let’s look at the data on savings rates.
Last year, Mark Vink, a Treasury economist, analysed the savings rates of different birth cohorts of New Zealanders. People who are currently in their late 20s or early 30s are saving at higher rates than their parents did at the same age:
Eyeballing the chart, it looks like Boomers – ie people born between 1950 and 1959 – had net negative savings rates throughout their 20s and 30s. They were borrowing more than they were spending. By comparison, people born between 1980 and 1989 – the unfairly-derided Millennials – appear to have saved upwards of 10% of their income in their mid-20s, in spite of the fact that many of them had to borrow to pay university fees.
Vink observes that Boomers’ profligacy and Millennials’ prudence is likely to be due to the fact that Boomers did, in fact, have it easier when they were young:
A surprising feature of the data is that the saving rates of younger generations appear to be generally higher than those of the generations preceding them. To check this result I used a variety of econometric techniques, and all suggested that this pattern is robust. Contrary to popular opinion, successive generations of households appear to be saving at significantly higher rates than earlier generations did at the same age. One plausible explanation for this rise in saving rates, supported by other related research, is that it reflects the precautionary response of younger generations to an economic environment with higher unemployment and less generous public welfare than faced by their parents.
It probably is true that young people are buying a different mix of goods and services than their parents did at the same age. But that’s not because we’re spendthrifts: it’s because the relative price of things has changed over time. Some things that were expensive for young Boomers, like consumer electronics, air travel, and clothing, have gotten cheaper due to globalisation and technological change.
Here’s a chart based on Statistics NZ’s Consumer Price Index. Since 1985, the price of international air transport has declined by 29%. Bicycles have gotten 38% cheaper. (Adjusted for quality, new cars are almost the same price as they were in 1985.) The price of women’s footwear – and apparel in general – did rise in the late 1980s, but it basically hasn’t budged in over 20 years. Adjusted for quality, the price of telecommunications equipment – ie cellphones – has fallen by a staggering 95% since 1999.
Housing is a very different story. According to the CPI, the cost to buy housing has risen by an astonishing 350% since 1985. This outweighs price movements in just about any other CPI category.
Basically, what this data shows is that saving money on discretionary expenditures like dining out or going on holiday is no longer a viable strategy to afford a home. It may have worked 30 or 40 years ago, when the ‘nice to haves’ were comparatively pricier. But today, housing has gotten really, really expensive relative to all the other things that we buy, and a lot of things that used to be luxury goods, like consumer electronics, are now cheap enough to be enjoyed by most people.
In this context, Alexander’s advice to cut back on small luxuries just doesn’t make sense. For instance, the required deposit on an average Auckland house is around $160,000, or 20% of the current median price of around $800,000. In theory, I could save a deposit by never going out for brunch. But in reality, brunch only costs around $20, so it would take 22 years to save up the money, assuming that I would otherwise go out for brunch on a daily basis. (Which I don’t.)
Lastly, it is true that mortgage interest rates were considerably higher in the 1980s than they are today. According to Reserve Bank statistics, the floating mortgage rate for first home buyers peaked at just over 20% in 1987, compared to its current level of 5.7%.
However, buyers in the 1980s didn’t have a harder time paying the mortgage, as high inflation quickly eroded away their debt. Although interest rates were high, this mostly reflected high inflation rather than increased difficulty obtaining or paying off a loan. After accounting for inflation, real interest rates were considerably lower.
That’s illustrated in the following chart, which shows annual consumer price inflation and mortgage interest rates since 1970. The green line on the chart, calculated as the difference between the two series, provides a rough estimate of the real interest rates that people were paying on mortgages. Real interest rates may have been a bit higher in the late 1980s, but they were negative in the 1970s, when many older Boomers bought homes.
Basically, Alexander’s assertions about the savings behaviour of young people are false, his suggestions about ways to save even more money to buy a home are largely useless, and his references to the high mortgage interest rates faced by Boomer homebuyers are misleading. These kinds of articles are inaccurate, patronising nonsense, and it’s high time news outlets stopped printing them.
Edit: Since I wrote this, BNZ CEO Anthony Healy has apologised for Alexander’s comments. Kudos for that.