When I was growing up through the 1970s the only financial advice that stuck with me was the rule of thirds on what to do with income. It was to allocate one third on rent, one third to spending for everyday living, and a third saved.
Oh, how naive; how quaint.
Today rents in England account for half of the tenants’ take-home pay if you are lucky enough to live outside London. In the big smoke expect the proportion to be 75%.
The rent just ate the savings.
And for today’s younger renters there is no bailout from inheritance despite the apparent wealth of the baby boomers. The typical inheritance age in the UK is somewhere around 60, and the median amount handed down is about £11,000.
Not surprisingly the youth are not happy.
The Institute for Economic Affairs (IEA) in the UK, was brave enough to publish numbers that suggest 80% of youngsters blame capitalism for the housing crisis, 75% believe the climate emergency is “specifically a capitalist problem” and 72% back sweeping nationalisation.
Worst statistic of all for a right-wing think tank—67% of youngsters want to live under a socialist economic system.
It’s a similar story in the US.
A Harvard University study in 2016 found that more than 50% of young people reject capitalism, while a 2018 Gallup poll found that 45% of young Americans saw capitalism favourably, down from 68% in 2010.
So much for the libertarian land of opportunity.
And so much for the trickle-down.
The numbers for youngsters do not add up anymore.
At the end of 2021 in Sydney, the average house was selling for $1.36 million and units for $837,000 with a typical Sydney house about $340,000 more expensive than it was at the end of 2020.
Take a deep breath for this statistic—the rise in value in a year matches the full cost of a house just 25 years ago.
Who can afford the mortgage?
Borrow the money to purchase one of these $1.3 million houses to avoid paying rent and you will need $65,000 on the minimum 5% deposit and expect to pay back the bank $4,500 a month for 30 years.
Total repayments of 1.62 million at $54,000 per year in after-tax dollars.
The average salary of an Australian in 2021 was around A$99,600 per year with a wide range starting around A$33,000 and a median salary of A$72,000.
Assuming an approximate tax burden of 25%, a single person on $72,000 could pay the mortgage but would have zero dollars left for any of the other bills life throws their way.
Clearly, this is not sustainable.
Rather than do what most of us baby boomers would do and lament the loss of the picket fence and the Sundays spent painting it white, how about a reboot.
What if ownership was not the only route to the long-term security of house and home?
What if we invented new social norms that not only promoted rents but removed the landlord. Let’s take rent-seeking out of the equation and have society build the housing stock at cost, then rent that stock to individuals in the community at rates that reflect recovery of those costs and perhaps a modest return linked to the bank rate.
You know, the sort of thing a sovereign wealth fund could handle.