Housing affordability has become a worldwide issue since the global financial crisis (GFC), partly because mortgage lending has been significantly curtailed by regulation. It is the younger generations, usually needing the highest loan-to-value ratios and loan-to-income ratios, who are most affected.
In Australia, the share of homeowners aged 25 to 34 is 45% (it was 58% in 1986). In the US, the current rate is 31% for under 35s, against 39% in 1995, while, 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.
This generational effect goes beyond the GFC and is symptomatic of how equity has become concentrated in older generations through a history of home ownership, mortgages and price rises.
Meanwhile, younger ‘equity have-nots’ find it increasingly difficult to access owner occupation, requiring large amounts of equity to fund rising prices and higher deposits. Generation Y (aka Generation Rent) is having to delay life choices such as marriage and parenthood, and one of the essential requirements to become a home purchaser is now a dual income, despite the low interest rate period seen post-GFC.
Things look different in China. A recent study by HSBC found that 70% of Chinese millennials are homeowners. But closer examination of this trend confirms that this, too, is related to the concentration of wealth in older generations. The Chinese one-child policy and an extraordinarily high savings ratio have combined to create ‘seven-pocket kings’. That is, young people able to draw on equity accumulated not only by themselves but by two parents and four grandparents. This, and the widespread practice of parents buying homes for or with their offspring, has resulted in an exceptional wealth transfer from older generations to younger ones.
One option for Gen Y in the rest of the world is the private rented sector. Around one-third of the population in Anglophone countries now rent, while those with a shorter history of widespread owner occupation have always experienced high rental rates (for example, Germany at nearly 50%).
However, owner-occupation rates in these formerly tenanted countries tend to be rising. It might be expected that they, too, will see a gradual concentration of housing equity among older age groups.
The policy challenge across the developed world is how to deal with a generation of renters unable to access housing unless they receive a legacy from older generations. Few governments will want to see Gen Y grow up into elderly renters, in need of housing support and rent subsidy at cost to the public purse. So, the focus will be on how to provide the secure, rented accommodation needed now while encouraging a new generation of owner-occupiers over the longer term.
This will be a particular issue for developed economies, but not irrelevant to recently emerged ones, such as China. We expect that the scarcity of equity among first-time buyers and limits to affordability in many western countries will act as an effective ceiling to house prices and lower price growth will be the result.