In the evolving landscape of Australia’s property market, the advantages enjoyed by the Baby Boomer generation (those who were born between 1946 and 1964) stand out remarkably. As a professional buyer’s advocate based in Melbourne, I’ve observed firsthand how these advantages have created a significant disparity between Boomers and younger generations, particularly when it comes to property ownership and wealth accumulation.
Exponential Growth in Property Values vs. Wage Stagnation
Over the last four to five decades, property prices in major Australian cities like Melbourne and Sydney have skyrocketed. To put it into perspective, the median house price in Melbourne has increased by approximately 14 times, and in Sydney by around 17 times. However, during this same period, wages have only tripled. This stark contrast has created a financial landscape where the dream of home ownership has become increasingly unattainable for many.
While younger generations struggle to save for a deposit amidst stagnant wage growth, Baby Boomers were able to purchase properties when prices were more in line with their earnings. Back then, it wasn’t uncommon for a mortgage to be paid off in just three years, a stark difference from the decades-long commitments seen today.
The Capital Gains Tax (CGT) Advantage
Another significant factor contributing to the wealth gap is the introduction of Capital Gains Tax (CGT) in Australia in September 1985. Boomers, who were all adults by that time, had already started acquiring property, many of which are now classified as pre-CGT assets.
For those unfamiliar, pre-CGT assets are exempt from capital gains tax, provided they were purchased before the tax was introduced and remain under the original ownership. This exemption has allowed many Boomers to accumulate substantial wealth through property investment without the burden of CGT, further amplifying the financial benefits of their investments.
The Power of the ‘Bank of Mum and Dad’
This advantageous environment has also given rise to the so-called “Bank of Mum and Dad,” where Baby Boomers, having benefited from these favourable conditions, can provide significant financial support to their children. With access to untaxed funds from pre-CGT assets, Boomers are uniquely positioned to assist their offspring in entering the property market—a luxury that is becoming increasingly rare for younger generations given much familial wealth still resides in the older generations and hasn’t yet passed down the next cohort.
Strategic Selling and Succession Planning
For those Boomers holding pre-CGT assets, there is a strategic element to consider when it comes to selling or passing these properties on to the next generation. While these assets remain exempt from CGT as long as they are held, the situation changes once they are transferred via an estate. Upon passing through an estate, a cost base calculation is triggered, which can diminish some of the tax advantages.
Therefore, it may be prudent for Boomers to consider strategically selling these assets as part of their succession planning. This approach not only allows them to capitalize on their investments while still enjoying the tax benefits but also enables them to rightsize and recalibrate their financial portfolio to better support their retirement and the needs of their children.
The Baby Boomer generation has undoubtedly enjoyed a unique set of circumstances that have allowed them to build significant wealth through property investment. From purchasing homes at a time when wages were in line with property prices to benefiting from the exemption of pre-CGT assets, the advantages have been considerable. As the landscape continues to evolve, younger generations are left grappling with the challenges of high property prices and stagnant wage growth, making it increasingly important to understand the generational shifts in wealth and the long-term implications for Australia’s property market.