by Matthew Sutton
A phenomenon over the next 20 years will be the Baby Boomer generation either downsizing or dying and having their house sold in their estate.
In either circumstance, I can see that without a substantial “market correction” the expected value of the property will be much higher than the generation below will be able to afford it.
It is well-known already that those in their 20s are largely unable to afford a house, and those in the 30s and 40s unable to buy a house that their parents would have had at a similar point in their life.
I have discussed this at length with relatives and friends, colleagues and clients, bank managers to MPs.
The predominant reasoning from the older generation (the Baby Boomers) is that they knew how to save while the succeeding generations are wasteful lotus-eaters with only have themselves to blame.
I would concede that I do have an iPhone, which 40-year-olds wouldn’t have had 30 years ago – although I would humbly suggest that this would have been difficult at the time.
Oh, and my iPhone is only a work tool: there is no chance I would buy one from my own pocket, so all I am doing is using the work tools expected of the day, a bit like the Hewlett Packard 12C of the 1980s.
“Yeah, but you and your foreign holidays…” Personally, I have yet to go on a family holiday (my eldest is 12), but I can see that some people have managed to get away rather more regularly.
Although, of course, plane flights are cheaper than train journeys, and since the UK is so expensive, pretty much any destination is going to be cheaper than a staycation.
“And all your clothes are those fancy labels…” Those fancy labels that have their garments produced in the Far East and are much cheaper than clothes were 30 or 40 years ago.
And then the big one: “You don’t know what it was like to pay 20% interest on your mortgage…”
No – I don’t. Absolutely correct. At the same time, I don’t know what it is like to have the average price of a house approximately three times the average salary.
I don’t know what it is like to get income tax relief for the interest on my personal mortgage. And most significantly, I don’t know what it is like to have the value of my mortgage disappear merely as a matter of inflation.
Because, of course, while inflation means that savings are worth less and less, so are loans. You take out a loan of £10,000; 15% annual inflation means that loan is only worth £8,696 a year later if you do nothing but cover the interest. It is worth £7,561 another year on.
That is the huge fallacy peddled currently. “Oh, the poor saver, struggling with only 0.5% interest.”
On the whole a saver’s pot will be worth less at the end of a year in a bank, by the difference between interest and inflation.
But it is very rare for interest to be above inflation, so the saver’s pot will always diminish, whether in an economy of high or low interest rates, because the rates will follow inflation.
Inflation is, after all, the tool with which the Baby Boomers effectively removed any value accrued by their parents, the Second World War generation, who actually were pretty good savers.
But that generation weren’t “smart enough” to be “sophisticated investors”, and so hadn’t contributed into index-linked investments or final salary pension schemes.
They had lived in the pre-house-owning era, so didn’t have a house, couldn’t afford rent and were left in penury because, as the argument was back in the early 80s, they hadn’t saved enough for their retirement.
History wouldn’t repeat itself, though: lessons would be learnt from the Second World War generation. The Baby Boomers promised themselves index-linked pensions (at the ballot box) ensuring that their retirement wouldn’t be poverty-stricken in the way that their parents’ was.
So they bought houses (averaging at three times salary) on mortgages which they inflated away, moved up the housing ladder, and so on. This was obviously after free university education. With grants. But, to be fair, no iPads.
And they worked pretty hard. At least that’s what they say now. That doesn’t really correspond with any of the stories or anecdotes I hear.
Everything I hear or read suggests that teachers, doctors, policemen are working harder than ever. Certainly the long boozy business lunches, meetings on the golf course and so on are largely a thing of the past.
The Baby Boomers were much more sensible than their parents, though. They had a pension. They didn’t actually save any money for the promise the pension fund made.
That would have been difficult and unpleasant. Much the better way to sort that problem out was to promise themselves the pensions, making them index-linked (don’t want that rotten inflation ruining the fun), and then let the following generations pay for it by way of future tax and government debt.
And so that is where we are. They bought houses at three times average salary, and paid off the debt by way of inflation, in essence, using their parents money to pay for their houses.
They then promised themselves a wonderful mortgage-free, rent-free retirement to be paid for by their children, grandchildren, great-grandchildren and so on, despite loading them up with student debt and other things.
Just to top it off, they now want someone to buy their houses at 10 times their salary – without the mortgage interest relief. And actually having to repay the outstanding balance. Don’t want pesky inflation going above 2% and chipping away at that millstone of a mortgage.
Don’t worry though, they want to spend their well-earned savings and pension on foreign holiday and cheap clothes. ‘Cos they’re good little savers.
Matthew Sutton is a former St Edmund’s School and Canterbury Cathedral chorister. He joined Burgess Hodgson in New Dover Road in 2001 and became a partner in 2010. He lives with his wife and children in Bridge.