18/08/2018
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Home > Legal & Financial > Generation Rent

Generation Rent

In The Islander’s home port of Mallorca there has been much discussion of late about the regional government’s restrictions on short term holiday rentals in the regional Capital of Palma. The problem they seek to address is the rapid rise in monthly rents pushing prices beyond the pockets of ‘normal’ people. It’s a debate that has pushed backwards and forwards, with strong opinions on both sides, but it is reflective of a growing problem that is mirrored in property hotspots around the world, and the definition of property hotspots is also growing. The pattern that emerges is the near impossibility of Millennials (those born after 1980) to even aspire to owning their own homes until they are in their forties, and in many cases the aspiration of property ownership at any point in their lives is a receding dream. There is of course no god given right that anyone should be able to own their own pile of bricks and mortar, but ‘Generation Rent’, as they have become known face financial problems in the coming decades that has ripples for the wider economy as a whole.

Statistics differ from region to region, and country to country, but broadly speaking home ownership is falling dramatically across much of the Western world from its peak in the mid nineties. The rising cost of education, and a decade of low pay, and limited pay rises, coupled with low historic low interest rates has fueled house price inflation.

If you were lucky enough to get a foot on the bottom rung of the property ladder, let’s say at least 15-20 years ago you have enjoyed the lowest mortgage rates in history. At the same time poor returns on the stock market, and near zero interest on savings, and growing pessimism on the returns of pension investments have seen many take the opportunity to extract some capital from their property and invest further into the buy to rent market. If you missed the opportunity before the financial crisis, then tighter lending regulations in the mortgage market, and a radical slow down in the construction of new homes in early years of the credit crunch constricted supply just as the buy to let investors moved in. Day one of economics lessons tells you that when increased demand meets limited supply, up go the prices. In short, if you already have a house, it is relatively easy to buy a second, or third. If you haven’t got one, you have a slim chance of ever buying one. This started as a problem in the high value areas like London, Manhattan, Hong Kong, and parts of Mallorca and many more, but as the ripples widen, people are being priced out of the market in more and more places every year, and they face the prospect of being life long tenants.

So why does this matter? There is a stability, socially speaking, from home ownership, you know you have a place to raise your family in something that you can one day pass on to your kids, you have the security that you are not going to need to move on, with all of the associated rigmarole, every few years. More importantly, if you crunch a few numbers, you are increasingly going to be financially better off with your own place, or two.

Typically these days, a mortgage tends to be about 20% of the salary of the holder on a monthly basis, and aside from significant interest rate rises, that seem distant at best, you know what you will be paying for the duration of the loan. Assuming that you get a little pay rise every once in a while, that percentage effectively reduces over time. If you time it right, you can look forward to paying it all back just in time to retire, which is usually when we experience a drop in our incomes. Perhaps this is also the time to downsize, pocket the difference and go on the holiday you’ve been promising yourself all these years. In these property hotspots however, rents are touching 50% of a tenant’s income and inflating faster than wages, so you are getting a little worse off as this proportion rises steadily year on year, with little chance of the situation improving. More importantly you will continue to pay increasing rents as your retirement income dwindles until the day you shuffle off this mortal coil.

The wider implications of this gulf right down the centre of the middle class, between those who bought, and those who rent are serious ones. If a tenant is spending half their income on rent, they have much less disposable income to spend into the rest of the economy, from restaurant meals, to cars, to holidays, which perhaps explains why growth in many Western economies is still more sluggish than we might expect more than a decade out from the financial crash. The worrying implications as this generation moves towards retirement in the coming decades also present a problem. The welfare bills and care for the elderly are going to be an awful lot more expensive if Grandma is going to be faced with sky high rents into her 80’s and 90’s, which surely must be funded by higher taxes in future.

How to fix it? Build! And build a lot. Social housing, affordable housing, any housing, but the only way to rebalance the disparity between demand and supply is to radically increase supply. It’s not going to be easy, but if society leaves it too late to address this problem, whether you are a have, or a have not, we will all end up footing the bill.

 

By Phill McCoffers