Another economist warns about intergenerational wealth in Australia

Australia Broadcast Center

a day ago

Why are more economists talking about Australia's intergenerational wealth challenges?
Guy Debelle, a former Reserve Bank deputy governor, joined the fray last week.
In a speech in Sydney, he said one of Australia's big challenges, in the next decade or two, will be managing the huge transfer of wealth that will have to occur from older generations to younger.
"Superannuation and housing are possibly the ultimate embodiment of intergenerational issues in this country," he said, as reported by the Australian Financial Review.
Dr Debelle was talking about an issue the Productivity Commission raised in 2021.
In its 2021 report, "Wealth transfers and their economic effects," the commission said Australian had experienced strong growth in household wealth over the last 20 years, but it had been very uneven.
"The wealth of the average older Australian has grown remarkably since the turn of the century," it said.
"Retirees in particular have seen disproportionately strong growth in their wealth relative to younger people.
"Indeed, at a time where one would expect retirees to be drawing down on their wealth to fund consumption, their wealth has actually increased."
The commission said housing wealth was driving the phenomenon, along with growth in superannuation balances.
"Older age groups own more housing wealth, they draw down on that housing wealth slowly, and they inherit large housing wealth from their partners in old age," it said.
The below graphic, from the commission's report, showed what happened to real house prices in Australia between 1970 and 2018, relative to incomes.
The report said while trillions of dollars in wealth would transfer from older Australians to younger Australians in coming decades, the timing of the wealth transfer could create its own challenges.
"By the time people receive an inheritance, they will be well into middle age — about 50 years old on average — already established in their careers and housing, and many will potentially be nearing retirement themselves," it said.
It kickstarted a national conversation about the need for wealth transfers to take place sooner, about the social benefits of older Australians downsizing their homes in retirement, and about the tax system generally.
But that was four years ago, and house prices have soared (again) in the meantime.
So in July last year, JBWere updated the numbers in that 2021 commission report to account for the growth in asset values that has occurred since.
The commission report had referenced research from 2017, estimating that older Australians would transfer $3.5 trillion to younger generations over the next 20 years.
But according to JBWere, that figure now stands at $5.4 trillion over the next 20 years.
Its report revived questions about Australians receiving large inheritances so late in life, and how our tax system and housing situation were contributing to the phenomenon.
It said the value of inheritances, and the age of receipt of inheritances, both peaked about 60 years of age.
"This increased age of receiving an inheritance can be traced back to the rise in the average age of having children and increased life expectancy," the JBWere report said.
"It does, however, raise the question of the need of recipients at this stage of life, compared to either earlier years (Bank of Mum and Dad) or for some bequests being directed elsewhere where greater need exists."
At the beginning of last year, the former Treasury secretary Ken Henry had also warned that our tax system had deteriorated to the point that he was worried about Australia's "social compact" holding together.
He said housing, the state of climate policy, and the commonwealth's over-reliance on taxing workers' incomes were three areas of major policy failure.
"It's an intergenerational tragedy that we have allowed this to happen," he lamented.
And last week, Dr Debelle also linked Australia's housing and tax situation to global economic trends.
He said the political problems we're seeing in so many countries, and the "quackery" that's underpinning some current economic policies (such as Donald Trump's tariff policies) were symptoms of a larger problem.
"One of the root causes of where we are today — particularly in the US, but it's also true in many other countries — has been the failure to distribute the gains from economic policy changes," he warned.
Then on Friday, Cotality released its latest "Housing Chart Pack" data.
It showed property values in nearly half of Australia's suburbs were sitting at record highs at the end of June.
In Brisbane, almost 80 per cent of its suburbs had record-high property prices. In Perth it was a similar story.
CBA's economics team said the upward momentum in property prices since mid-February had been fuelled by the Reserve Bank's interest rate cuts this year.
The latest Westpac-Melbourne Institute consumer sentiment survey also showed that house price expectations jumped by 7 per cent in June, to its highest level since 2013.
It showed over three quarters of consumers now expect property prices to rise over the next 12 months, especially in Queensland and NSW.
But it said those expectations for property price increases weren't exactly filling Australians with confidence.
"Despite this positive outlook for house prices, consumers remain relatively averse to real estate as an investment option and to risk in general," Westpac's Matthew Hassan said.
"Indeed, responses to our quarterly question on the 'wisest place for savings' suggest that the tariff-related turmoil this year has seen what was already a high level of risk aversion intensify even further.
"Consumers still heavily favour 'safe options' with 55 per cent nominating either 'bank deposits' or 'pay down debt' as the wisest place of savings, up slightly from 52 per cent in March.
"Interest rate cuts have done little to shift these views so far," he said.
It's a familiar dynamic.
The majority of people expect property values to keep rising, and those price increases will keep boosting Australia's household "wealth".
But will it be good for the Australia's younger generations? What's the end-point in all of this?