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The Wealth of Ages

The wealth of ages | A discussion on housing affordability

Housing affordability and its implications on society has become a worldwide issue since the global financial crisis (GFC), particular across English speaking societies. The debate is becoming increasingly generational, pitting the Baby Boomers against Gen Y or, the perhaps more appropriately named, Generation Rent.

To the Baby Boomers, Gen Y are ‘the most indulged young people in the history of the world’ who would be able to afford a house if they ‘just stopped going to “hipster cafes” and eating smashed avo on toast’. To Gen Y, Baby Boomers have benefitted from free education and generous pensions and have enormous property wealth but they are still trying to take away one of the few luxuries the younger generation enjoy: their brunch.

While it is easy to fixate on stereotypes, it is important to understand the statistics behind them. The facts speak for themselves when it comes to homeownership, or the lack thereof for Gen Y.

In Australia, just 45 percent of 25 to 34 year olds own their home compared to 58 percent in 1986. It is even lower in America at 31 percent of the under 35s compared to 39 percent in 1995. This obviously has an impact on the amount of housing equity Gen Y own. In the UK, only 5% of housing equity is owned by the under 35s, who are now paying four and a half times as much in rent to landlords as they are in mortgage interest.

Bucking the trend

There are of course exceptions to this global generalisation. A recent study by HSBC found that 70 percent of Chinese millennials are homeowners. This is despite sky-rocketing house prices and similar affordability issues seen in many western countries.

A key differentiating factor is the One Child Policy and the ability and willingness of the Bank of Mum and Dad. Due to the imbalance between male and females, Chinese parents will often help purchase a property for their sons, improving his eligibility. Additionally, Chinese parents will often move in with their children later on in life so the property is also an investment for their future.

Affordability

What has changed to cause the decline in homeownership? Yes, Gen Y are delaying life choices such as marriage and parenthood, which often prompt home buying, but is this a cause or effect? Without the presumed stability that homeownership brings many do not feel ready to embark on these milestones. Additionally, although the decline has been more rapid for the younger generation, homeownership rates for older generations are also decreasing.

The answer is more likely to lie with housing affordability. However, even when examining this issue, there is not a simple explanation. First home buyers face two separate affordability questions:

1. Are they able to afford the monthly mortgage repayments?
2. Do they have enough savings for a deposit?

The amount people are borrowing compared to their income has been steadily rising over the past few decades. Back in the 80s, having a dual income was not critical to becoming a home purchaser, now it is virtually an essential requirement. However, since the GFC, while in many countries the loan to income ratios have continued to increase, the low interest rates have eased the repayment affordability.

Instead, the primary concern for the majority of first home buyers is being able to afford a deposit. Countries where high loan to value lending was common pre GFC have, on the whole, seen these products withdrawn, resulting in significantly higher deposit requirements. This means that many first home buyers are dependent on the ‘bank of mum and dad’, often restricting homeownership to those from wealthy families.

Alternatives to homeownership

If homeownership is not possible, housing options for Gen Y are limited. In some countries, particularly Mediterranean locations such as Italy and Spain, the number of thirty-somethings still living at home is high while in many countries the private rented sector is the only option.

The attitude towards the private rented sector varies across the globe. In Germany, renting is the norm and the sector has a good supply of high quality rental accommodation and favourable tenant conditions. Consequently, nearly 50 percent of their population live in rental accommodation, many out of choice.

By contrast, in Australia, the UK and the US, homeownership is traditionally an aspiration many hope to achieve. However, the rental sector is growing, particularly among the younger generations, accounting for roughly one third of the population in all three countries.

While many surveys suggest homeownership ambitions are still alive and kicking, a small but growing number of millennials are choosing to rent, for either longer or forever. Geography is often the deciding factor as young professionals are willing to rent for longer in more desirable, central locations close to work and amenities rather than buy a property on the outskirts of a city. It is very telling that the HSBC study also showed that across the nine countries surveyed, 55 percent of Millennials would consider spending less on leisure to own a home but just 18 percent would buy somewhere that is not their preferred location.

Regardless of whether renting is by choice or necessity, security of tenure is an issue many tenants face. Historically, the structure of the rental market was based on the assumption it is a short-term tenure before the transition into ownership. The response has been the emergence of large-scale purpose-built developments tailored to the needs of tenants, a model called ‘multi-family’ in the US and ‘build to rent’ in the UK. This is a welcome change for renters, as the product offers more choice and stability in the sector.

What does the future hold?

The shift from homeownership to the private rented sector is a trend that looks set to continue in many of the English speaking countries. This raises a number of long-term issues that need to be addressed.

Part of the concern is that owning a home has become much more than providing shelter. The housing equity Baby Boomers have accumulated over their lifetimes is an important nest egg for retirement and acts as a buffer for any unexpected and costly events.

While Gen Y may dwell on the supposed unfair advantages the Baby Boomers have or blame factors such as foreign investors for unaffordable housing, action is needed. Many of the governments in countries where the shift to renting is happening have introduced policies to try to help first home buyers. However, many of these policies, such as ‘Help to Buy’ in the UK or First Home Buyer Grants in Australia, boost demand but do little to help the much needed supply.

None of the policies introduced are expected to help enough first home buyers afford a deposit for a property in a location they want to buy in order to reverse the shift to renting. Therefore, housing and saving for retirement options need to adapt. Build to Rent is part of this solution but pension, saving and investment systems will need to adjust to prepare for a larger number of retirees to be renters.

More information

For more information, view our latest global publication 'Impacts'.

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