Millennials should stop moaning. They’ve got degrees & low rates

April 4, 2016

4 April 2016

By Stephen Koukoulas

Generation Y is feeling really hard done by. There is massive resentment about Generation X and the baby boomer generation and the free university education they enjoyed, the remarkably low house prices they paid and the generous tax treatment of superannuation the oldies currently enjoy.

Millennials would be wise to be a little more reflective whenever they snipe about how unfair life is.

Let’s think back to the 1970s and first half of the 1980s, when today’s baby boomers and older Gen Xers were in their 20s and 30s.

Back then, only one third of the population finished high school. Two-thirds of people were under-educated and therefore skewed towards semi- or low-skilled professions.

Today, more than three-quarters of young people, including today’s Gen Y, have finished high school. They are reaping the financial and other benefits that better education unleashes.

It is a similar issue with university attainment. While a university education may well have been free in the old days, only 3% of the population actually got a university degree in the 1970s and a ticket to higher incomes. Today, about 15% of young people get a university education. Sure they have to pay for it, but the trade-off between no tertiary education and a low-skilled job versus a small fee and wonderful career opportunities is one that is easily calculated.

Gen X and the baby boomers, whether they left school early as most did, or went to university as a few did, entered a workforce that, with a few temporary exceptions, had an unemployment rate above 6.5% and was sometimes as high as 10%.

Gen Y see an unemployment rate not much higher than 6%. It has been 13 years since the rate has been above 6.5% and there is a simple correlation between a low jobless rate and the ease of getting a job.

That greater educational attainment – helped by Gen X and baby boomers voting for more university places – could also be why Gen Y are reasonably articulate in venting their anger.

While house prices today are high, it is possible for any Gen X person to go to a financial institution, get a loan and pay a staggeringly low interest rate as they buy their first house.

Those Gen Xers and the baby boomers who took the risk of buying a “cheap” house in the 1970s and early 1980s were confronted with interest rates that averaged 13% and peaked at 17% in the late 1980s. If any Gen Y has ever put that sort of interest rate into their mortgage calculators, they might choke on their skinny soy lattes.

It is important to also recall that in the cloistered banking sector of 30 to 40 years ago, customer loyalty to a bank was important in getting a loan. If you were a Bank of New South Wales customer, it was difficult if not impossible to get a loan with a different bank. Or if you did, they would only lend you about 80% of what you wanted at the mortgage rate (remember, double digits) and the other 20% would be a “cocktail” loan with a personal loan type interest rate. There was minimal competition so it was a take it or leave it offer from the bank.

Research by the Reserve Bank of Australia shows that interest rates and not house prices are the most important determinant of servicing a mortgage debt. At the moment, the average mortgage repayment is a smaller proportion of income than the long-run average. Servicing a big mortgage on an expensive dwelling with low interest rates today is about as easy, if not easier, than managing a smallish loan on a cheap house with very high interest rates in the 1970s and 1980s.

Perhaps it is a time-honoured fact that older generations are richer than the young. After all, they have had many years to accumulate savings and wealth and young people haven’t.

It is also important to be frank and acknowledge that it is always hard to buy a house. It was in the 1970s, in the 1980s, 1990s and it still is. It requires a huge savings effort and a bit of time with baked beans on toast and glamour-free holidays to get your foot in the door.

And do Gen Y really want zero university fees but fewer university places? Do they really want much lower house prices but 13%+ on their loan?

Moderate university debt is the price the population pays for greater access to university. Anyone who has been in the paid workforce since 1991, including every Gen Y, has been accruing superannuation savings, while many baby boomers had zero superannuation for the first 10 or 20 years of their working lives.

Young people today are facing significant financial challenges, but this is not a new story. Progressive policy makers have, over the past four decades, looked at sustainable ways for the population to have the best possible access to education, housing and retirement savings. Everyone, young and old, has benefited from these policies and it is vital that policy settings do not hinder progress in these areas.