House prices through the generations

Australians are increasingly buying their first home at an older age. According to the Australian Bureau of Statistics, between 1981 and 2018 the average age of a person buying their first home in Australia increased from 24 to 35. There are a number of reasons for this trend including housing affordability, tighter lending standards, and changing living preferences amongst younger generations. However, one consideration that may be influencing the home purchase decision amongst younger Australians may be lower return expectations of first home buyers versus older generations.

The below chart shows real (inflation-adjusted) Australian residential property prices for first home buyers through the generations. It shows that for someone born in 1950, who purchased a house at the age of 30 (in 1980), the value of the average Australian property has risen by 187%. The analysis is replicated for those born in 1960, 1970 and 1980 under the same assumptions. Contrary to popular belief, those born in 1970 (Generation X) have experienced a similar return from housing as those born in 1960 (Baby Boomers) as they approach the age of 50. For those born in 1950, the greatest appreciation in house prices has occurred over the past 20 years, a period of time that has coincided with falling interest rates and low inflation. For those born in 1980 that purchased their first home in 2010, the performance of their house has been relatively poor relative to other asset classes, rising by only 9% in real terms over the course of the decade. By way of comparison, over the same time period global equities delivered a real total return of 145% (in AUD terms), Australian equities generated a real total return of 97%, while Australian government bonds produced a real total return of 63%.

Given the current high level of Australian house prices relative to incomes, without higher wages growth it is difficult to see the recovery in house prices seen over the last six months of 2019 being sustained over the medium term. In the short term, any interest rate cuts or quantitative easing from the RBA would certainly provide a tailwind for house prices, but with the Cash Rate already at an all-time low of 0.75%, the potential for a sizeable amount of additional monetary policy stimulus appears limited. Given the low absolute level of interest rates, it is unlikely that those purchasing a house today will experience the high house price returns that older generations of Australian homeowners have experienced.