Why Millenials can’t buy a house?
For our parents’ generation, owning a house was a status symbol, financial security and necessity, and a “kiraye ka ghar” (rented place) was something to be embarrassed about. But for many young folks today, chasing esoteric jobs and the next unusual experience, a house doesn’t figure on our bucket list. We love to travel across 50 countries before we turn 30, have three jobs or own our business rather than buy a home. This has led to a paradigm shift in the real estate industry globally.
Millennials are satisfied sharing their apartments with more people if it helps them save on housing and lodging costs, or fund their next trip, next car, next outing or the next iPhone or any expensive electronic gadget. It is vital to note and understand the underlying drivers of millennials’ behaviour and why they cannot afford to buy houses and no longer interested in buying real estate to live as compared to the previous generations.
One apparent reason that comes to my mind is that millennials or the Gen Z don’t want to get tied down to a house for the rest of their lives. The flexibility of changing jobs and workplaces is more convenient. Moreover, a considerable EMI burden of 20-30% early on in their careers isn’t desirable.
But I want to address a more fundamental problem. To first explain it, we have to rewind the clock to 40 or 50 years again and consider the scenario of the US. So, way back in 1970, the average income or family household income was $9870/year. And that is obviously without adjusting for inflation. But in today’s dollars, that would make the average household income of $54,000/year. But today the average household income is actually $56,000/year.
So, today the average family has more buying power than they had back in 1970. But that’s actually few percentages, so roughly you have the same buying power that your parents had or your grandparents had, for all the Gen Z’s out there.
Also doing some quick math on this: –
the average income or family household income in 1970 = $9870/year
Today the average income or family household income = $56000/year
That is roughly = $56000/$9870 = 5.7 times income increase over 50 years.
Now, let us take a look at the average household price in 1970. It was about $23,600. And today the average household price is $215,000.
Meaning that the average household price has increased about $215000/$23600 = 9.1 times.
So, the average household price has increased by 10 times roughly but whereas income has increased by only 5.7 times. Meaning that one of the problems why Gen Z and millennials cannot buy houses because they are making less than their parents but that the housing prices have gone way higher proportionally to how they were in 1970. But that is only one of the reasons. So, let’s keep digging more.
Another quick math here-
The average price to buy a home in 1970 with your parents and grandparents is roughly 2.4 times the average income. But, meanwhile today, it’s over 4 times your average income. So, clearly, the price to income ratio has increased by roughly 50-60%.
This taught me to question why have real estate prices increased over the last 50 years, yet, the salary of the average person or average household has not. This got me thinking, and I spoke to my dad about it. My parents bought a home about 11-12 years ago. In the course of these 11-12 years, the valuation of their home has increased quite a bit. And this is observed as a good thing when people buy houses, they think it partially as an investment, even though its not a significant investment, its kind of a neutral one.
So, I heard some news clips recently were people in Ontario and Toronto want to increase the supply of houses being built in the area. This is because they realize that it is nearly impossible to own a house for the millennials or Gen Z. Now if you increase the supply of houses, it will hopefully decrease the prices of owning a new home for the first time. But there is a push back of these legislations by particularly home-owners, people who happen to be in the 50s and 60s. This is because those people who already own a house, they are pretty much enjoying this increase in valuation of their homes due to increasing demand of their real estate, yet not increase in a proportionate amount of supply. So, this has been seen a lot in a place like San Francisco, where real estate prices are shooting up every 10 years for the last 30 years. This is because the demand in San Francisco has gone up a lot. However, there hasn’t been an adequate increase in the supply of affordable real estates. So, there has been a considerable pushback on the legislature itself that would increase the number of homes being built in the area, specifically apartment buildings and single-family homes. Thus, I understand the frustration with many home-owners who do not want any construction of any real estate in their province, their city, their state and so on.
So, make sure you save a decent amount of money, say a $2000/ year, that would be good. If you keep a ton of money in say 5-10 years, then you can finally buy a tiny million – dollar home in a city somewhere. Then a legislation is passed that would decrease the value of your home, at least for the next few years or for the foreseeable future. Now how would you feel, that all of a sudden you have collected a giant some of the money and the legislature says the value of your money on the property will go down over time. Hence, a lot of governments are in a weird place where they do not want home-owners to be mad, whereas they also do not want the new buyers, crazy. They are in this “limbo” state (remember the movie -Inception…. Haha), regardless of what they do they will screw someone over. But that is not the only reason why millennials and Gen Z cannot buy homes, i.e. price and income changes occurring in the last 50 years.
So, these are some of the reasons why young people can’t buy a house instead don’t intend to even. What do you think? Do let me know in comments below if you have some other ideas to add.