In the fight to bring down inflation, the Reserve Bank has smashed the more than one-in-three Australians with home loans by dramatically raising interest rates on repayments.
But a further third of our society have paid off their housing.
They tend to be older and they’re enjoying higher asset prices and bigger returns from their savings.
Data shows they’re spending at a rate far exceeding inflation – working against the goal of lowering the temperature of the economy.
This has a growing number of experts questioning whether interest rates should be used as almost the sole tool to tackle the inflation crisis.
Aquaculture expert Greg Jenkins has benefitted from interest rates climbing at the steepest rate in the history of our economy.
On the verandah of his home on the outskirts of Perth, he’s looking forward to imminent retirement and some big trips.
“My wife and I, never been better,” he says.
“We don’t pay a mortgage, the stock market’s earned a 9 per cent increase in the year.
“The interest rates actually make it better for us because we’re earning more money on deposits.”
And that rising wealth has sent a clear signal: spend.
“We’ve probably spent more money in the last two years than we have in the last 20.”
But Greg isn’t happy about it.
“We’re not paying the price,” he says.
“I can guarantee that decades ago, when people got together and decided that interest rates were going to be the lever to control inflation, none of those people had mortgages.
“It doesn’t impact them, it doesn’t impact us. It’s not right.”
Spending big
Trying to tame inflation, the Reserve Bank has sharply lifted interest rates in the past year because it wants people to slow their spending.
That has hit borrowers, especially the more than one-in-three Australians with home loans, which are now larger than ever.
Interest payments have, on average, more than doubled in the past year.
But the impact isn’t even.
This graph makes it clear. Younger people are cutting spending. Older people are spending more.
That’s even when you take into account how much prices have risen in the past year – the black dotted line.
While under-35s have increased spending by 3.4 per cent in the past year, inflation has been closer to 7 per cent, so that’s a real cut.
Meanwhile, over-35s have increased spending by 7.7 per cent, which is above inflation.
People over 55 have gone on a purchasing spree – spending 10.4 per cent more than a year ago, well above how much costs have risen due to inflation.
Inside the wallet
CommBank iQ analyses anonymised data about spending from the accounts of about 7 million people, customers of the nation’s biggest bank.
Wade Tubman, head of innovation and analytics at the company, says the numbers don’t lie.
“Inflation is running high at the moment. But the amount that the over-55s are increasing their spending is even more than that,” he says.
“And basically that means they’re increasing their consumption.
“They’re buying more stuff, they’re buying more holidays, they’re buying more T-shirts or whatever.”
Beware the average
But there’s an important caveat: this is average data.
Not everyone over 55 years of age is wealthy, and spending at a great rate. Not everyone under 55 is doing badly and has trimmed their spending. But on average that’s what’s happening.
“If we think about the lever that the RBA has regarding interest rates, the spread of (people with) mortgages in our population is not even and is definitely concentrated to some of the age groups,” Mr Tubman says.
That means that people at younger ages are feeling the “cost of housing” more, through interest rates and because a higher percentage rent where they live and rents have been rising rapidly.
Conversely, Mr Tubman says, some of the older groups in society may not have only completed paying off their mortgage but also have savings where interest rates actually work in their favour.
“So what we end up with is a situation where, on average, over-55s, and in particular over-65s, actually have more money in their pocket.
‘Catch-up’ spending
An important factor, notes independent economist Nicki Hutley, is what they’re spending on.
“Older people particularly spend a lot on health, and we know health costs have been rising much faster than the CPI (consumer price index) average,” she observes.
“As an older person, you’re more likely to be buying things like travel, like health, that have had much higher price increases.
“So you’ve got to be careful when you’re pulling all those numbers apart.”
On the impact of inflation – and the fight to lower it – things are pretty clear.
“But what it does mean is, obviously, younger indebted people are doing more of the heavy lifting than older people with net savings.”
Ms Hutley says much of the boom in outlay on travel could be classified as “catch-up spending” after the COVID years deprived people of the ability to leave their home, state or nation.
“And I think there’s an overhang from COVID when we actually couldn’t travel and we were sitting in our homes and thinking ‘we’ll do some renovations’ or ‘we’ll buy a new couch’,” she said.
“If you had the money, we got into a bit of a habit of spending more. And that’s taking time to wind back.”
There are ways to lower inflation that aren’t just lifting interest rates, but they’re slower, harder and potentially political dynamite.
To lower inflation, Ms Hutley says both government and the Reserve Bank have to work together.
“But it’s monetary policy – interest rates – that will have the widest effect. And one of the things that we can rely on, unfortunately, is it is not equitable.”
Privileged position
Tax expert Kristen Sobeck sees inflation hitting three groups.
First up are the unemployed. Inflation generally means there are more unemployed people, and the Reserve Bank has been saying Australia will need higher unemployment to lower inflation, almost a full percentage point higher.
Second are workers whose purchasing power – what they can get with their money – is eroded by inflation in the price of goods and services.
Third are borrowers who see an increase in the cost of servicing their loans.
“What we know is these three groups – the unemployed, workers and borrowers – disproportionately are effectively the working age population,” she says.
“Most certainly it does seem the working-age population is kind of bearing the brunt of the inflation crisis, relative to those who don’t have a mortgage, who aren’t employed and are in the consumption phase of of life.”
Ms Sobeck says that, even with the pressure, borrowers are in a privileged position: they’ve gathered a deposit, qualified for a loan and have bought an asset that in general will accumulate value over time.
“The most vulnerable individuals in our society are the renters, or the individuals who don’t own a home,” she says.
‘Stolen our children’s future’
With his working days almost over, Greg Jenkins is pained by how policy decisions have distorted the property market and made an essential human need – shelter – more difficult to get.
“We have to change the way that we do business in Australia, we have to make everything more equitable,” he says.
“And we have to support the most vulnerable in our society.”
He compares his experience of buying a first home with that of his daughter.
In 1990, Greg and his wife bought a house in Roleystone for $40,000, the same amount as their combined annual incomes. Annual interest rates went up to 18 per cent for a period.
“I’m sick of baby boomers saying we had it tough, compared to now,” he says. “We didn’t have it tough, this is tough!”
His daughter just bought her first property, a $600,000 two-bedroom unit.
That cost is more than eight times the average taxable income in 2020-21, which was $68,289 according to the Australian Taxation Office. It’s almost 12 times the median taxable income of $50,980.
Greg wants to see people in his generation who are doing well wear some of the cost of bringing down inflation, such as through higher taxes or changing the way profits from property are dealt with by the tax system.
“We need some mechanism that restricts spending right across the board,” he says.
“Otherwise I think that our generation – my generation – has inadvertently stolen our children’s future.”
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This makes my blood boil. Boomers used to be young once and carried the load. Boomers worked hard to repay their mortgages and raised children with no money for holidays and extras. Now they have saved and have some leisure time they are suddenly the bad guys.
Also many are giving their children funds for a deposit to purchase a house. Greg says he did not have it hard- lucky Greg.
When I bought my first home in the 70’s in the UK rent was 9.00pound a week. My husband earnt 9.00 pound p.w and I earnt 7.00 pound. Our mortgage was 7.00 pound a week.
When we bought in Australia rates were 18% we had 2 children . My husbands salary paid the mortgage and our living expenses were paid by my wages. We had to pay before and after school care for me to be able to do this. I am now 76 and I am still working full time in our business, my husband is 78 and works too. My children will be ok if the government dont take everything from us. “You will have nothing and be happy”.
The government wants it cake and eat it too. They expect Boomers to spend their savings and superannuation, even increasing the pension age to encourage them to do so. At the same time Boomers are blamed for increasing inflation.
Also, the government wants no unemployment and requires “mutual obligations” to be fulfilled to encourage people to enter the workforce. We are then told that an increase in unemployment will improve inflation. Sounds like plenty of contradictions there.
Not all older Australians are cashed up and they need to hang onto funds for any major expenses that can and often come along. Particularly healthcare and related services. Governments typically spend money and restrict spending to help keep them in power. We can only ask, is this really responsible management?
Give me a break, the only reason inflation is out of control is because Government detached themselves from having their FIAT Currency backed by Gold Reserves when they could not spend more than they earned.
Now they can spend till their hearts content by merely creating currency out of “thin air” without any need for it to be backed by real money. This has led to a flood of currency dropped into society all chasing the same products/services leading to their prices inflating.
Prior to the 70’s, before this change was made there was no inflation.
So it isn’t the boomers causing this, it is the irresponsible Government who have no idea what they are doing whilst they spend all of our futures out of existance.
great article, the reasoning of experts really amazes me like this one. It is the baby boomers spending causing inflation?. There are some other opinions being expressed by Our government, complaining that baby boomers hanging on to their assets and don’t spend their wealth which they highly encourage as that would be good for the economy. Our RBA Governer points the finger at greedy business not reducing prices now the supply has returned to normal, but Lets hit out at the babyboomers who worked hard, invested wisely, used time to achieve their goal of financial independence. My honest opinion, good onya babyboomers spend your hard earned money and enjoy your time you earned it and most importantly don’t trust experts
0 would suggest
Greg is obviously incredibly privileged. He can’t see past his good fortune and understand that not everyone is as fortunate as he is. He may have had an easy time in his early years, but not all of us did. Interest rates were up to 18% and even those capped at 13.5 % often struggled to pay their mortgage and fund a family.
I don’t have unlimited funds to spend up big and I spend very little.
Greg is irresponsible to fuel the hatred the young already have for the boomers. I can only hope that he reaps some of the nastiness he is sowing for all of us.
Are we having a generation war, again.? Divide and conquer, is the strategy to resolve the war against this stubborn inflation. I don’t think, it is healthy to blame any one generation for the cause of economic ills. Everyone is going through a life cycle. The boomers should enjoy the fruits of their labor, as the generation before us. As we had the tough time in 1970s, 1992, and 2008, we did not blame anyone, but thanked for the resilience of our economy and hard work of the workers. Blaming others is a sign of inadequacy. I am sure our younger generations are a lot better than this.
Curious and Peter H are spot on with their comments looks like government just looking for a scapegoat, we baby boomers are not in power the government is, or they are supposed to be. What were we supposed to do all those years ago, not look after our interests? the politicians and those in high positions certainly look after their interests lining their pockets, I wonder how much the RBA governor is on plenty I’ll bet. Yes, we had high inflation but did not blame any generation.
Funny, my reading does not suggest the government wants boomers to pay more.
This article seems to be a discussion by a Commbank and an independent economist and some words from a well heeled boomer.
Besides, doesn’t boomer spending keep mortgage holder in work?
60 years ago the Government had a system called Statutory Reserve Deposits. This allowed them to call up a % of monies the Banks held in deposits. Thus the amount of money in the system could be controlled by the Fed.
Is that worth a new try?
Personally, I remember the years of 18% interest. The loans weren’t what they are now, but they were high compared to our income at the time. We didn’t spend a lot on overseas holidays when raising our families, and in retirement we’re comfortable but by no means living the high life- we have to have a budget like everyone else. We still give money to charity, which comes out of our capital now, because we know there are many people doing it tough. What about targeting negative gearing? We have a number of friends who are doing very well after investing in 2 or 3 properties, nicely funded by the government.