Bernard Hickey: Boomers' tastes hobble a generation

Opinion

Baby boomers have just experienced the best financial decade of their lives.

The equity in their houses rose by more than $200 billion to over $400 billion and they went on a debt-fuelled spending spree to celebrate.

They are responsible for a good chunk of the $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 they will not be able to rely on continual capital gains or a publicly funded healthcare and pension system to support those lifestyles.

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.

These taxpaying voters will be joined by unsympathetic foreign creditors. Treasury has forecast New Zealand government net debt will be well over 120 per cent of GDP without any changes to the current pension and healthcare entitlements. International creditors will push up interest rates to prohibitive levels.

Baby boomers will also want to free up cash for their own reasons. They proved themselves as adept spenders during the last decade, specialising in instant gratification on an enormous scale. That will not stop.

This is a generation obsessed with improving themselves and living in the now. They will want to sell their houses in the suburbs and downsize to an apartment or holiday-style house on the coast, and be able to free up cash they can then put into shorter-term deposit or on-call accounts.

That poses a challenge for parts of the housing market and the stockmarket.

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 stockmarket 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, an influx of young migrants, a stockmarket boom, a housing bust or the end of the mass migration of New Zealand-born graduates would stop this scenario from developing.

This big liquidation sale is good news for some though - marketers of retirement villas and apartments, and banks looking for term deposits.

The losers remain the generations to follow.

bernard.hickey@interest.co.nz