Will Millennials Be Called Generation Rent?

So firstly, who are the Millennials? Well, exact consensus on the start dates differ but most people will call you are a Millennial if you were born somewhere between 1982 and 2004. Or for those who don’t like having to add or subtract a Millennial will be aged between 13 & 35 as of 2016. Millennials are the largest generation in Western history. As of 2012, it is estimated that there were 80 Million Millennials in the United States alone. The massive size of this cohort will mean that they will dominate everything for years to come, just as the Baby Boomers have for the last 30 odd years. So what are Millennials all about? Without wanting to generalise here, and individual millennials may not identify themselves with any of these traits, but generational theory says that the major events that each generation grew up with can shape their identities in a similar way. Millennials are on track to become the most educated generation in Western history. They have grown up never knowing a time without the internet and have embraced technology like no other generation before it. In addition to entertaining themselves, and keeping up with their social contacts, millennials also use their devices (yes they will generally have more than one) for research and education. Millennials also have a strong social value system. The majority of Millennials are concerned by social issues such as unemployment, the environment, income inequality, and would like to see Governments do more to address these issues. Millennials are more likely to support same-sex marriage and the legalisation of marijuana. Millennials are the most ethnically, religiously, and racially diverse cohort ever. As such Millennials tend to be more accepting of all kinds of people, no matter the colour of their skin, what they wear, who they love, or what religion they choose to follow (or not follow). So why are they in danger of being called Generation Rent? Well, as I have discussed in other articles looking back at property prices from 1975-2015 (https://www.thepropertymentors.com.au/lets-get-perspective-2015-whats-investment-time-frame/) property prices have grown above that which would be seen from just inflation alone. As a result, property prices have grown faster than incomes and, using a rather blunt measure of affordability, the so-called House Price-Income ratio, properties have risen from around 3 x income to somewhere between 5 & even as high as 10 x income (Sydney) depending on what state you live in. TPM blog 1Source: R.B.A However, many Aussie Millennials think that they have been ripped off by previous generations and that they will be left having to pay for the decisions of previous generations. Before we go too far with that train of thought, let’s put some perspective around things.... History Repeats Itself! Just about every generation will have a gripe about the ones before and the ones that come after it. The saying “When I was young...” has been repeated for centuries. For Millennials it might be handy to acknowledge that the roads or rails that you catch that public transport to those schools that you attend, have all been paid for by the taxes of generations that have come before you. What Does The Median Price Have To Do With A First Property Purchase? This is where I have to be a little bit politically sensitive. See it is all too easy to say that property has become unaffordable for first home buyers or first-time investors. If we just use the commonly used statistic of Median Income – Median House Price as a measure of affordability then yes housing has become more unaffordable over the years. But our population has also grown, & interest rates and inflation rates are at historic lows. The problem for most people commenting on the issue of housing affordability, and for all those Millennials that are complaining about how all the Rich Baby Boomers have priced them out of the market, are usually talking about the fact that median house prices relative to median incomes having risen over time. Sure, with the median wage sitting at close enough to $80,000 p.a and the median house price in Melbourne sitting at $725,000 according to the REIV (see below) the median house price to median income multiple is sitting at a bit over 9 times. June Quarter 2016 Metropolitan Median Prices tpm blog 2 Prices for regional Victoria are also available here. *All quarterly median prices are seasonally adjusted and quarterly. Annual change is based on rolling annual figures. But so what? Unless you are already on a higher than average income, invent the next Google, win the Lotto, or you fall into a large inheritance, you shouldn’t be thinking about buying a $1.27M inner Melbourne house as your first property anyway. And just for a bit of a reality check, most of the Builders, Baby Boomers or Gen-X didn’t start out buying median priced properties as their first purchase either. They bought what they could afford, in areas they could afford, and then traded up if and when they could afford it. And for a bit of perspective, many homes were bought in times when interest rates were as high as 18% p.a. (unlike now where we can show you how to get a rate as low as 2.00% p.a. (ask us how if you are paying more than this), inflation hit has high as 16.5% p.a, the unemployment rate got to 11.0%, and through some major events like World Wars, the Oil Crisis, Asian Currency Crisis, DotCom Crashes, GFC etc. Let me be crystal clear – at no stage will we ever say that buying your first property is easy. Not when my grandparents purchased their first home, not when my parents bought their first house, nor when I purchased my first property (I actually started by buying investment properties before even thinking about buying my first home), and not now. But that is the point. If it were easy then everybody would do it, and there would be no need for anyone to own an investment property. And yes we know that the real house prices have most certainly disconnected from wages, rents and construction costs since the late 1980’s (see below). tpm blog 3 According to the 12th Annual Demographia International Housing Affordability Survey: 2016 Rating Middle-Income Housing Affordability “…the real culprit [of poor housing affordability in Australia], the real source of the problem, was the refusal of local and state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet demand.” So where are all the politicians now we are having a real discussion on housing affordability and including supply chain dynamics???? The only real question you really need to ask yourself is do you think property prices are going to come down, or is it only going to get harder to get your foot on the property ladder in the future if you continue to wait? Now, what I am going to say here is not meant to be offensive to those saving hard to get their foot on the property ladder, but please understand if you are trying to buy your first home, you probably will not be in a position to be buying a median-priced property. And certainly, that first property is unlikely to be found within the inner ring premium suburbs in an Australian major CBD. No, more than likely, you will be buying a small unit or an outer area house. And yes that will mean you may have to make some sacrifices, (e.g. stay at home longer, buy an investment property first, give up your lattes, &/or accept something less than ideal) to be able to afford to live where you want and in what you want over time. So yes you might need to live in a 1 BR unit to start with or in a house that is not brand new, or does not have all the bells and whistles that you might ultimately desire. But as with all investment decisions (yes buying your own home is also an investment decision) it pays to have a strong education, a thorough plan, and a great team around you. In fact, according to a recent report by the Financial Planning Association and social research group McCrindle, 63% of people studied had no plan, or only a very loose plan, for how they were going to achieve their financial goals. Interestingly, the study also revealed that buying property is still a major financial goal for more than 50% of the Millennials studied, and buying an investment property was identified as important by only 20% of those studied. What I find even more interesting is that the goal of buying a property is over twice as popular a goal as becoming financially independent. The report also highlighted that all generations have financial regrets. The research, conducted for the Financial Planning Association of Australia (FPA), discovered that 47% of us regretted we had not saved more, 34% wished they had spent less, and only 27% thought they could have invested more. Turning The Property Ladder Into A Property Escalator! So Millennials are known for their adoption of new technologies and ability to embrace smarter and more efficient ways of doing things. So why should property be any different? See back in the day my parents told me go to school, get a good education, get a job, buy a house, pay it off over 30 years and everything will be fine. However, as a plan that sucks! Let me explain why! How much money does your own home generate for you in retirement? ZERO, ZILCH, NADA, you get the picture. Sure it is great to own your own home, and the peace of mind that the security of never having to pay rent again can be a powerful motivator. So not only does a Principal Place of Residence (PPR), not pay you any income in retirement, you have to pay 100% of the costs and it does not offer you any major tax benefits whilst you are paying it off either. Let me ask you a question? What makes more sense to you? Option A Buy your first home (PPR), possibly one you don’t really love, in an area you don’t really like, but which you can afford, and get no assistance to pay the holding costs on that property. And because you will have no rental assistance you will probably only be able to afford to buy the one property for many years to come…. Or Option B Buy an investment property, that the tenant, and potential tax benefits, subsidises the cost of, whilst renting a better quality property yourself, for less money than what you could afford to buy in an area that you would prefer to live in any way? Because of the rental income you receive you may be able to continue buying multiple properties year after year. Plus chances are whilst you are young, you are going to move around a bit anyway, and your property needs are likely to change as you mature and potentially start a family. Just by changing the order of buying your own home first, and then waiting to buy an investment property, or two, later down the track to buying investment properties first, and your own home when you can afford it, could make a profound difference to your wealth position over time. Plus you actually may have a better quality of life at the same time. There is More Than One Way To Skin The Property Cat? In fact, for the Millennial who is wanting to turbo-charge their investment career, I am going to make a rare statement here for a property bull. Buying a property, may not even be your best first investment anyway. That is not to say that you may not be able to use property to grow your wealth, but rather by using creative structures, you may still be able to benefit from the growth of property, without ever needing to take ownership of that property. Furthermore, perhaps going into debt early on in your investment career may also be counter-productive to your long term wealth. Curious to know more? click this link. This will not be for everyone, but if you can march to the beat of your own drum, and don’t want to be stuck with the same results that everyone else gets check this out.

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