The never-ending rise in household debt is borrowing from the future to pay for pleasure in the present. Credit:Oliver Astrologo LF Economics, founded by Lindsay David and Philip Soos, warns this may be helping a new generation to over-leverage into mortgages they can't afford, leaving their parents' homes exposed. "Unfortunately, this loan guarantee strategy in a rising housing market for securing ever-larger amounts of debt is essentially pyramid or Ponzi finance. This leaves many parents in a dangerous predicament should their children experience difficulties making loan payments, let alone defaulting and suffering foreclosure." "In reality, many parents – the Baby Boomer cohort – are asset-rich but income-poor. The blunt fact is few parents have enough savings and other liquid assets on hand to meet their legal obligations without selling their home if their children default," the report warns. Property experts disagree furiously about whether prices are in a bubble and about the best measure of housing affordability.

The dream of home ownership is further out of reach for many young Australians. Credit:Jessica Shapiro Treasury secretary John Fraser has said that Sydney house prices are in a "bubble". But many economists remain wary of the term and point out that supply constraints and strong population growth will underpin prices, even if slower wages growth inhibits further price gains. LF Economics argues that price gains have outstripped the fundamental worth of properties. "Financial regulators have ignored the Ponzi lending practices by lenders, believing the RBA will have the adequate ability to bail them out at taxpayers' expense the day this classic Ponzi lending scheme breaks down." Lindsay David is the co-author of a new report "Parental Guidance Not Recommended" which warns buying property is like joining a Ponzi scheme. Economist Saul Eslake disagrees with the Ponzi term, however: "I would absolutely agree that Australian house prices in Melbourne and Sydney are very high both by historical and international standards and that they are very high in part because of the willingness of Australian households to borrow very large amounts of money relative to their incomes."

In 1975, the median Sydney house price was $33,960, compared to the median household Income of $8273 – a multiple of 4.1, according to the LF Economics report. Prices remained fairly constant as a multiple of incomes until 1996 when lower interest rates sparked a phenomenal rise in home prices. Economist Saul Eslake warns of growing social harm being caused by rising property prices. Credit:Pat Scala As of the middle of this year, the median Sydney house price was $1,004,767 according to data from the Real Estate Institute of Australia. The median household income was $85,067, according to an ABS survey of income and housing adjusted up for growth in average weekly earnings. But thanks to record low interest rates, it still costs less today to service a mortgage out of the typical income than it did in 1989 when interest rates hit an eyewateringly high of 17 per cent.



Back then, Sydney mortgage costs soaked up an entire year's household income. Today it's more like 70 per cent, according to LF Economics, still way above the 30 per cent of income that indicates mortgage stress. Buying a unit is much more affordable. Unit prices in Sydney are almost eight times typical household incomes, taking an average of six years to save up a deposit. Once bought, the cost of servicing a mortgage on a unit still soaks up 50 per cent of income.

The report warns that mortgages are likely to remain a shackle on young buyers for much of their lives, given that interest rates are already at record lows. At least mortgage holders who suffered under double digit interest rates in the late 1980s soon felt relief when mortgage rates were slashed during the recession "we had to have".

"As deposits and loan sizes are bigger today, first home buyers will have to commit an increasingly large proportion of their incomes to mortgage costs regardless of dwelling price trends. Purchasing property in the midst of a bubble carries significant risks via negative equity and unemployment." Mr Eslake does not expect a property price crash, but does warn that forces are shifting that will dampen demand and increase supply. Slower population growth will limit new demand. Meanwhile, a growing proportion of Australia's housing stock is owned by investors, who may be more willing to sell if they think price gains will disappoint. "I'd still be surprised if there was a crash, but there may well be a sustained decline two to three years down the track." That would not be a bad thing, Mr Eslake added, as rising house prices served little economic benefit and contributed great social harm by deepening wealth inequality between property haves and have nots.