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The FT captured the millennial zeitgeist with last week’s feature on the spending habits of 20-somethings, but the theme of financial change also resonated in the Eley household.
My children were born just after Y2K, but they have all the millennial traits. I spent my paper round money in Our Price record shops. To the iPad generation, the thought of a paper round seems absurd. They are more likely to spend their pocket money at Nandos, and who buys CDs or DVDs when you’ve got Spotify and Netflix?
But there is a great anomaly amid all this living for the moment. Millennials may prefer to experience rather than accumulate, but there is one piece of “stuff” they all want to own, even though it costs a fortune and ties them down for decades: a house.
One reader’s response to last week’s feature summed it up: “My biggest wish is to own my own home and everyone around me says the same . . . Our appetite for pension saving is much lower than owning a property.”
This is in contrast to past generations, who dutifully put their money into endowment policies and pensions week after week, but had little expectation of home ownership. My dad happened to be visiting last week, and informed us all that he and my mum were only able to buy a house in 1966 because his uncle worked for a building society, which swung their mortgage application.
Their next home, bought in 1971 during the “Barber boom”, stretched them to the limit. Generations before that had little hope of ownership; my grandmother lived in rented accommodation for all of her 89 years. At my age (mid-forties), my great-grandfather and his family had only just moved out of rented rooms.
Renting in those days was pretty grim. By and large, it still is; the quality of housing is patchy and decline of social housing has left tenants facing arbitrary rent rises and insecure tenancies. At the same time, credit has become much more widely available — and cheaper.
During my dad’s 31 years as a mortgagee, the Bank of England’s base rate varied between 5 per cent and 17 per cent. Today it is 0.5 per cent and interest rate futures suggest it could stay there until 2019. Disposable incomes are higher, too; the starting rate of income tax was 30 per cent or more until the late 1980s, and women did not have their own personal allowance until 1990.
The fact that buying has become cheaper, easier and more attractive than renting is not the only factor. To many millennials, housing is seen as the key to their long-term financial security. Perception is not reality, of course; for the 47 million Britons who don’t live in south-east England, long-term house price performance has been acceptable rather than spectacular.
Take my own parents’ house, which is valued at about 4.5 times what they paid for it in 1987. That might sound impressive, but it equates to compound annual growth of 5.3 per cent before inflation. If it were sold now and converted to an annuity, it would generate £15,700 per year (with no inflation uplift). And my dad would still need somewhere to live.
Yet the siren song of home ownership still seduces young and old. Behavioural economics helps explain why. House prices have risen substantially in recent years. Every lurch higher is faithfully reported by national newspapers and television stations. They are overwhelmingly based in and around London, ground zero for house price inflation and rentier economics.
By contrast, shares, the main vehicle for modern pension saving, have been volatile. When the stock market makes the evening news or the front pages, it is usually because it has tanked. The FTSE has recovered most its recent losses, but no newsreader has popped up to announce that “billions were wiped back on to markets today as share prices recovered”. You will hear all about Tesco’s accounting scandal, but not that shares in Ashtead, a FTSE 100 plant hire group, have risen 2,000 per cent in seven years.
Even more significant than the propaganda is the policy. Property has long been tax advantaged: primary residences are exempt from capital gains tax and most of them will soon be exempt from inheritance tax too. Increasing ownership rates has long been a government objective. The sale of council homes reinforced the message that only losers rent. On top of that, Whitehall has a direct vested interest in rising house prices through Help to Buy, since it receives a percentage of a home’s value when it is sold on.
Millennials may or may not be “annoying”. But their desperation to own property at any cost is more rational than it looks. They don’t need a financial adviser to tell them that they can borrow stacks of money cheaply to juice the returns from an asset whose price has been rising for much of their adult lives.
They know that the government is so wedded to rising house prices that it will never withdraw the fiscal punch bowl. Choosing between property and pensions — complicated, inflexible products that politicians just cannot stop fiddling about with — is like choosing between fine wine and sour milk. I mean, WTF would you do?
Jonathan Eley is deputy editor of the FT’s Lex column; firstname.lastname@example.org
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