Are the terrible saving habits of Generation X hindering their hopes of home ownership? Jack Han reports.
September 25, 2009
Saving to buy a home may be further away than imagined for Gen X, as their spending sprees and fewer funds in their savings accounts are dryer than ever.
A study has shown that Gen X is unlikely to ever own a home because their baby boomer parents have spent their inheritance.
The Flinders Institute for Housing, Urban and Regional Research (FIHURR) has recently released findings which show that home ownership for low income earners over 45 years old and medium-high income earners under 45 years has fallen by 15 percent from 1986-2006 .
It has also found that while the First Home Owners Scheme encouraged home purchases for Gen Y (under 25 years old), Gen X (25-44 years) is struggling for home ownership because property prices remain high and “their baby boomer parents are spending their inheritances”.
If our national income continues to be exhausted by higher house prices, Dr Joe Flood, who revealed the FIHURR findings earlier this month, says that “Australia will have to get used to being a country of low home ownership, people living with their parents, and small houses by international standards.
“The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world”, he states .
But one factor that is preventing Gen X from home ownership could be savings. In a Treasury report about household savings published last year, statistics show that for the last 30 years since the mid-1970s , household saving in Australia as a percentage of disposable income has steadily declined, from a peak of 18 percent in 1975 to only 1.8 percent this March quarter .
So why are we saving so much less? One of the biggest reasons is the rise of capital gains over the years. Because capital gains encourage consumption and is not recorded as income, this is lowering our household savings ratio .
The other big reason is easier access to credit, such as the introduction of credit cards, which allows us to consume more, and with better convenience .
The Treasury report also spelled out the way that we save. Besides saving for precautions or saving for inheritance, Australians approach savings differently at certain stages in our lives. We tend to spend instead of save when young, save and pay off debt in peak income years (around middle age) and tap into our accumulated savings in retirement .
So now we can see that the savings habits of the baby boomers could be the right path to home ownership in struggling times.
For example, Amelia earns $1200 a week, and wants to save $40,000 for a home deposit. If she saves as much as she normally does, at $60 a week (5 percent), it will take her 10 years and seven months to reach her goal. However, if Amelia boosts her savings ratio to 20 percent ($240 a week), she will be able to afford a deposit in only three years and three months .
This also assumes that Amelia constantly keeps her savings in the highest rate savings accounts, which today is the UBank Usaver, at 5.11 percent.
Even with rising prices and inheritance woes, the key to home ownership for Gen X and Y is a strong approach to saving. There's a good reason that baby boomers were able to secure homes despite very high interest rates and restricted finance, so take a savings lesson from your folks, and prove that the the Australian dream of home ownership is still alive in your generation.