Baby boomers have just experienced the best financial decade of their lives. The equity in their houses rose by more than NZ$200 billion to over NZ$400 billion from 2000 to 2010 and they went on a debt-fueled spending spree to celebrate.
They are responsible for a good chunk of the NZ$100 billion of the foreign debt added through the decade I call the ‘naughty noughties’. But they still came out of it richer in net asset terms, thanks to the doubling of house prices.
They want to continue enjoying their good fortune, but the next 20 years will not be so easy or simple. They will have to convert some of that equity in their houses into cash to repay debt and to keep the lifestyles they believe is their birthright. That’s because will not be able to rely on continual capital gains or a publicly-funded pay-as-you-go healthcare and pension system to support those lifestyles, particularly after 2020.
By then grumpy generation Xers and Yers who are paying higher taxes and have inherited the high debts will agitate to cut back these unsustainable public pension and healthcare payments to their parents and grandparents.
These taxpaying voters, as opposed to the benefit-receiving voters, will be joined by unsympathetic foreign creditors. Treasury has forecast New Zealand government net debt will be well over 120% of GDP without any changes to the current pension and health care entitlements for the bulge of baby-boomers who are about to retire. That debt level is Greek-like. International creditors, or bond vigilantes as they are sometimes called, will push up interest rates to prohibitive levels. Anyone looking for a sneak preview should look at Greece’s fate this week..
So baby-boomers will be forced to liberate some of that equity that fell from the sky during the boom. Many will also want to free up that cash for their own reasons. Baby-boomers proved themselves as adept spenders during the last decade, specialising in instant gratification on an enormous scale. Cars, boats, flat-screen TVs, decks, baches, holidays and thousands of flat whites and muffins were paid for through the ATMs attached to their houses. That will not stop. This is a generation obsessed with improving themselves and ‘living in the now’.
So they will want to sell their houses in the suburbs and move somewhere that better suits their low maintenance, high living lifestyles. It will also happen to suit their financial profiles. By downsizing to an apartment or holiday-style house on the coast, Baby-boomers will be able to free up cash that they can then put into shorter term deposit or on-call accounts. This gives them the flexibility to pay for the holiday, the wedding, the hip replacement or the new car when it is needed.
However, that poses a challenge for parts of the housing market and the stock market. This pressure to liquidate from 2015 to 2035 will exert an inexorable downward pressure on prices in the over-priced suburbs of Auckland, Wellington, Christchurch, Tauranga and Hamilton. This will add to the drag from a lack of easy, cheap money from the banks that so many became used to during the 2002 to 2007 boom.
Regulators and capital markets are forcing the banks to put aside more capital and slow their lending growth. The banks are also being forced to offer higher term deposit rates. The stock market will suffer with a lack of investment by Baby-boomers who want the regular return, safety and liquidity they will get from bank accounts.
Only a surge in GDP growth, a long-lasting influx of young migrants, a stock market boom, a housing bust or the end of the mass migration of New Zealand-born graduates would stop this scenario from developing. None of these seem on the cards.
This is big liquidation sale is good news for some though. Marketers of suitable retirement villas and apartments are already selling up a storm. Banks looking for term deposits will compete hard for this cash surge. The losers remain the generations to follow who will have to take over the baby-boomers’ debts if they want to buy a house and will have to pay through their taxes for the doubling of the pension and health care costs by 2030.
*This column first appeared in the Herald on Sunday.
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