Another handout for Baby Boomers. Thanks Joe!
I have long explained that legislation around wealth accumulation and wealth protection is designed by baby boomers for baby boomers.
The baby boomers didn’t want to live like their parents and they don’t want to live like the generations after them will have to either.
‘Mine, mine, mine’ seems to be the modus operandi.
Two years ago I wrote an open letter to investors under the age of 50 that went viral. You can read it here.
In that article I said, “Superannuation will be no good for you if you are under 50 today, so invest the absolute minimum amount into super. That means, no salary sacrificing, no co-contributions, no non-concessional contributions. Ignore the calls to save tax and boost your super.”
I concluded; “I believe by the time someone turning 40 today is entitled to extract their super, the tax rates will be higher, the amount they can withdraw will be lower and they may not qualify at all because the age, at which they can qualify, will move. Remaining in the workforce longer will be something that younger people will need to get used to, to fund the profligacy of the generation before.”
Only a year after I wrote that open letter, our esteemed Treasurer, Mr Joe Hockey recorded this dialogue, with the ABC’s Tony Jones, on the Q&A program:
Jones: So it’s on the cards that we could see, in this term, a change to the year – the age – at which you can access your super?
Hockey: Well, I think it’s something that we need to have a proper process to discuss with all the affected stakeholders.
Jones: But it sounds like it’s in your mind.
Hockey: It is on my mind and it’s on Tony Abbott’s mind. We’re thinking about how we’re going to make sure that the quality of life for Australians into the future is sustainable
Superannuation is simply too big an amount of money for a cash-strapped government to ignore. And remember if you are not a baby boomer ‘it’s not your money anyway’.
So park that thought for a moment.
In April last year I also wrote a piece entitled House Prices Ain’t Falling.
Here is an extract: “Longer term however – and keep in mind I am still working on an insight into why house prices won’t fall – I believe it is not in any government’s fiscal interest to abolish negative gearing. For reasons I will explain soon, not only do I believe the government should and will retain negative gearing, but they will be forced to consider extending the perk and introducing tax deductions for residential mortgage interest on the main residence as well as investment properties.
You see, there’s a wave of financial catastrophe coming for a generation of people unless the government assists others to buy property. Stay tuned.”
My basic premise is that the biggest store of wealth for most baby boomers is in their home (not in superannuation) and so if the government wants to avoid it’s own fiscal disaster, the government will have to rescue Baby Boomers from falling house prices.
Any policy that can keep house prices elevated so that baby boomers can profitably sell their own home(s) and downsize will be regarded as smart fiscal management. It’s not too much of a stretch to believe that is what Joe Hockey meant when he told the ABC’s Tony Jones; “we’re going to make sure that the quality of life for Australians into the future is sustainable.”
Remember, legislation is written by baby boomers for baby boomers.
And so we arrive in March 2015 with the latest policy suggestion; let the young, who cannot afford elevated house prices, dip into their super to buy property.
Whether you give people a first home buyers grant, let them dip into super or allow them to pay their stamp duty over a few years (as the NSW state opposition recently suggested) the net effect is higher house prices (not greater affordability).
Don’t be distracted by talk of affordability. Any policy that effectively gives the young more money to buy a house (in Tasmania, the Labor government recently increased the first home buyers grant to $30,000) is not about making houses more affordable. It’s all about keeping prices elevated to rescue baby boomers from any fall in real estate prices that would otherwise occur if a generation of people sold their houses at once to a generation below them who cannot afford present prices*.
Ask yourself what would happen if Joe Hockey handed everyone a first share portfolio buyers grant? Would the stock market be more affordable or would prices surge? The same thing happens in property.
So what advice to give the young? Be very, very careful. There’s a generational tidal wave (of wealth to be protected) and unfortunately you are not old enough to be on a ‘Mal’ riding its crest.
*Note: the top 20 per cent of income earners own 36 per cent of the housing stock
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery, find out more.
I’m 35. Worked and saved my whole life to own a home. Every year, the goal-posts have been moved. Now, life in Australia doesn’t make sense for me anymore. The money I saved for a deposit, that buys me a house outright in most US states. Got no kids and I’m not too fussy about blokes.
Got my passport last week, leaving in August.
First half-decent yank that proposes, gets me.
I get a green-card and half a chance of having a life without being a mortgage slave. Fair trade.
Bye OZ, goodluck.
Best wishes Rachael! Stay in touch.
I just think Land tax and CGT be brought into the main residence to stop the amount of wealth directed to the family home.
I also believe the banks are to blame here with unrealistic levels of gearing which is not available to shares. The point I have raised to many people, what if you were to purchase a million dollars of units in an ASX index tracking fund with a 10% deposit and a 900k loan vs buying a property most people would laugh at you. However, people do this with property everyday of the week.
By bringing land tax on the main residence and CGT together with the negative gearing aspect more people may think twice about investing so much of their wealth in the family home and it could just be a way to save the baby boomers allowing them to down size.
Very much enjoying the debate here. If I could add my two cents it could be summed up by “if you can’t beat ’em, join ’em”. Australia has a lot of inefficiency in Government and I am taking a punt that this will continue for decades into the future.
As a young investor I have missed out on the amazing gains on offer in property in the last twenty years due to:
– household debt going from 50% to 150% of DI in Australia
– financial deregulation and
– increase in double income households.
For sure the baby boomers have been given a massive free kick from all this and I agree that “they” are a little greedy in wanting to keep all this wealth for themselves (massive generalisations here I know).
However you have to accept the circumstances you find yourself in and for my money there is no better investment than prime real estate in supply constrained capital city suburbs. Aside from the huge tax incentives (from negative gearing and no tax on unrealised gains), the huge amount of leverage you can safely use means the average punter can outperform Warren Buffett consistently (with no chance of a margin call).
It is also the safest way (in my mind) to take advantage of the population growth that is occurring in Australia – I previously thought WOW was the way to take advantage of this but we have seen how quickly competitive advantages can be eroded there. Breaking down the population growth, the majority of it has come from net migration. Drilling down further, 90% of migrants move to one of the big 4 capital cities – which is a nice clue on where to invest.
With the retirement of baby boomers and associated costs / lower tax base, it makes sense for the Government to continue to import working age migrants who will pay taxes to make up for this drop in tax revenue.
Add to this the fact that Australia’s economy is likely to be knowledge-based in the future, with the majority of knowledge-sharing (and jobs) likely to be seen in the CBDs and it is clear that capital cities are the best place to invest.
Also I totally agree with keeping money out of super, I plan to use property as a wealth protection/creation vehicle for next 30+ years. As cynical as it sounds, I would much rather rely on Government ineptitude and maintenance of the status quo than believe the hype around putting money in super.
Nicely articulated arguments David. Thanks for contributing and hope to read your further thoughts…
I wish i was a baby boomer. They enjoyed a good life. They had and have everything in a good price. Not fair at all.
Great article Roger. Thanks
Every day reader of the Blog, first time comment, appreciate the results achieved in the Montgomery Fund.
And agree with the issues raised above, subsidies to any industry/markets create a false economy.
Living in a regional area we haven’t got the type of growth experienced in the city, so our land prices relative to inner city are still affordable.
My understanding was that the Banks control land/house prices; so who is making the most from the elevated prices?
However with first home buyers and the affordability, does the size of first homes ever get factored into the equations?
Having been in the building industry for 30 years, we started building first home house and land packages with houses between 12 – 16 squares with a carport.
I might be mistaken but most I see now are 18 square minimum plus a double lock up garage, two basins in every bathroom, apparently you have to have two ovens now as well, TV in every room….or have I just turned into a grumpy old man(Baby Boomer)!
Takes a bumpy old man to offer perspective and remind everyone of the change. Without wisdom we are destined to repeat the mistakes of the past.
Avito da Costa
As baby boomers without our own home and approaching retirement in about a decade, my wife and I also lament the ever upward march of house prices. [We live in a church house and move relatively often – nature of my occupation.] We have squirreled away what we are able to into super in the hope that when the day comes we will be able to buy a modest retirement home with a partial lump sum.
This hope is looking forlorn if house prices don’t stabilize and makes us wonder about the wisdom of not having invested in ‘bricks and mortar’ a long time ago. Despite the almost universal voice of investment pundits a couple of decades ago extolling the virtues of ‘shares over property’, the leverage that mortgages provide to poorer performing property seems to have trumped the unleveraged (and volatile) performance of share investments in super.
We have entrusted your team with a majority of our SMSF assets hoping that you’ll be able to keep us in the hunt. I must add that the prudence you have shown and the performance achieved to date are giving these renting baby boomers some hope! Cheers.
Your comment: “the leverage that mortgages provide to poorer performing property seems to have trumped the unleveraged (and volatile) performance of share investments in super” is undeniable. The leverage available for property, and without the features of margin loans, has created many multiples of millionaires. I do suspect that in the relatively near future, highly leveraged property owners will see some volatility that may be more painful for some. That could be your opportunity. “But if we hope for what we do not see, we wait for it with patience”
Hi Roger, on this note, just want to let you know that in the last 2 years I have recommended two ministers at my church to invest in your fund so that they may have something to retire on (given the paltry amount that ministers get paid) – there’s a community of people depending on the good work of your team! :-)
We’ve got our heads down with capital preservation and growth in mind.
Yes I agree it’s very nice to see someone come out and actually say what government is all about. Dipping into the pockets of it’s citizens and then changing the rules to benifit themselves. Roger you have highlighted a very important fact for all Australian’s to consider. How government’s evolve over time and how they eventually grind their citizen’s into the dirt just to hang onto power up to a breaking point where massive reform or revolution occurs. The USA is a perfect example of this leading into the revolution in the 1770’s. The important thing to remember is that all of the promises made by the government to fund social welfare programs are completly unfunded. They have no plan as to how to pay for future pensions or disability obligations. They are planning on getting it from future taxation reciepts and or to borrow it. As you have stated it will be paid for by people under 50 with higher rates of taxation. And all this while assuming a constant rate of GDP growth above average, no recessions calculated for. This can clearly be seen in the federal budget paper of 2014 that a link was provided for on this site. And the future fund is only 100 billion and is there to provide for their pensions not ours!
Thanks Aaron. have a great weekend and really appreciate you taking the time to share your thoughts here.
Treasurer Joe, leave super alone – you’re just not smart enough to reinvent the wheel.It was designed to help people fund their own retirement and to encourage all generations to seek a better life after they stop work.Stop picking at the low hanging fruit.
He knows he won’t get it. He’s just greasing us up for another round of FHB grants.
There has been a growing distaste for the boomer generation by those that are following. Not just in Australia, but worldwide, and this article reiterates several reasons why.
I can’t find it anymore but there is actually a website that is ‘counting down’ how many boomers are left alive/when they’ll all die out.
That sounds unnecessarily harsh. Some people always takes things to extremes. Sad really.
They’ve literally ruined the world. If it was in my power to speed up the process, I would.
I remember hearing the super to help pay for first home buyers and thought I didn’t hear it properly. How does increasing demand in a world of stable or declining supply lead to better housing affordability. Obviously it doesn’t, it just increases the number of participants who feel they are able to afford a home.
It also will exacerbate a long term problem (retirement social benefits) to solve a short term one. Great leading.
I also know that governments, of any stripe, will not want property prices to be generally declining as they will probably bear the brunt by voters wanting part of “the Australian dream”. Dream is right as the only place where assets are free from falls in price is not a place that can be found in reality.
What to do for someone like myself then who had the pleasure of being born a bit later on. Well we won’t have it easy, we will have to build our own wealth external of superannuation as difficult as that may be. I contribute my super at the bare minimum to a bunch of index portfolios to limit transaction costs. I also have to wonder whether I will still be alive to actually use it. Who knows what the retirement age will be in 30-40 years time.
Exactly and if you are in your early forties or younger be very careful contributing anything other than the bare minimum to super. See advice of course but be careful there too.
Thanks Roger. Nice to see someone call it as it is.
It is incredibly frustrating though.
Indeed Wayne. Thanks.
Another great article.
I agree with your analysis on why the government would want to support property prices especially in a era of sluggish economic condition.
I also think that Australian property price has reached a level that makes it ‘too big to fail/fall’. Falling property price will have significantly negative impact on ‘wealth effect’ and ripple effect on many industries (e.g. banking, construction, retail etc). Question?
1. As an investor, is your investment framework/criteria in equity (i.e. quality and value) applicable to property? Australian property definitely doesn’t meet the “value” criteria. Yet the price is expected to continue to rise. Is this a case that property investor would deviate away from focusing on “value” to focusing on price?
2. In spite of expectation of property price continuing to rise, there will be a time of reckoning as trees don’t grow into the sky. What do you think will trigger a meaningful decline in property price (i.e. by meaningful, I mean +20% fall)?
In answer to 1 Andy, value investing has worked and perhaps it means that one should expect higher returns by sticking to value investing where it can be applied.