Last week the Productivity Commission made a particularly thrilling announcement on that front. Over the next two decades, older Australians will pass on a mind-blowing $3.5 trillion to their younger counterparts! A wealth transfer that has economists, including one of its architects, former Treasury Secretary Ken Henry, very much alarmed. As he now concludes, the breakdown of Australia’s tax system puts the country’s “social contract at risk.” Besides owning a largely undisturbed natural environment, Australians have just come through 20 years of spectacular growth in household wealth. This prosperity has not been equally shared, leading to fears of wealth inequality across generations.
This report comes at an opportune time. Inheritances peak in value, and the recipients are often in their 60s. JBWere, in an independent review, has corroborated the commission’s conclusion. They have adjusted the numbers from the original Productivity Commission report to take account of recent asset price inflation. Property values have now reached all time highs in nearly half of all Australian suburbs. In particular, experts are beginning to focus on the ways these trends are exacerbating wealth inequality.
Economic Growth and Wealth Inequality
Although Australia has enjoyed long and prosperous growth in household wealth, this wealth has not been broadly distributed among demographic groups. According to the Productivity Commission, “the wealth of the average older Australian has grown remarkably since the turn of the century.” Indeed, wealth growth for retirees has outpaced it by a wide margin. This accumulation begs the question, whether or not such wealth is sustainable or equitable for those who come next.
The report’s key finding is a staggering one – more than 45% of all suburbs in the country have property prices at an all-time record high staggering. Most suburbs in Brisbane (nearly 80%) are seeing record high property values. The Reserve Bank’s interest rate cuts earlier this year have pumped up those increases. Consequently, property prices are getting an even larger boost. Yet, even with this favorable tide in house prices, consumer confidence in purchasing an asset in housing is still low.
“Despite this positive outlook for house prices, consumers remain relatively averse to real estate as an investment option and to risk in general.” – Matthew Hassan
These dynamics have created an unprecedented expectation among consumers. More than three-quarters expect house prices to increase over the next year, with that sentiment strongest in Queensland and New South Wales. Yet, a notable trend persists: consumers continue to favor “safe options,” with 55% indicating that either bank deposits or paying down debt is the wisest place for savings. This increase in risk aversion indicates a rising concern over macroeconomic stability, as well as personal financial security.
The Implications of Late Inheritances
The timing of inheritances is another important consideration for understanding intergenerational wealth transfer. As the Productivity Commission noted, the average Australian inheritance is first received by a person at 51-55 years. By then they tend to have already built families, careers and houses of their own. Unfortunately, this scenario presents its own set of challenges. There’s the question of whether we need these kinds of inheritances at this point in life.
“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.” – Productivity Commission
Further, as JBWere notes, this trend raises fundamental questions about the needs of these recipients at this later stage of life. The report suggests that funds might be better directed towards younger individuals who may require support earlier through mechanisms such as the “Bank of Mum and Dad.”
Ken Henry echoes these concerns by stating, “It’s an intergenerational tragedy that we have allowed this to happen.” His comments illustrate the relentless fight, pushing against vertiginous gravitational forces, to have a more just allocation of opportunity, and thus wealth, across generations.
A Call for Systemic Change
Guy Debelle, former deputy governor of the Reserve Bank enriches the story. He links Australia’s housing and tax predicament to larger global economic trends. He reflects on the growing burden that will come as mostly tax exempted wealth, especially real estate, moves from old to young Australians. As more households accumulate substantial assets later in life, it becomes increasingly essential to address how these transfers are managed.
“Superannuation and housing are possibly the ultimate embodiment of intergenerational issues in this country.” – Guy Debelle
The increasing frustration over these intergenerational challenges highlights the importance of systemic reform within Australia’s tax paradigm. Henry’s message is that this system is crumbling. This rapid decline now jeopardizes our economic recovery and social stability.
