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How a Real Estate Crash Can Help the Youth

Oct 6, 2016

35

A report from the Institute for Fiscal Studies (IFS) today announced that those born in the early 1980s have half as much wealth today as those born in the 1970s had at the same age.

This has caused a new round of "intergenerational inequality" hysteria in the newspapers, but if you stop to read the report properly you will see that it is all about one thing and one thing alone: house prices.

Incomes for those born in the 1980s are much higher than those born in most other decades and much the same as the incomes of those born in the 1970s at the same age. It would be nice if they were higher (it is good to see productivity gains constantly on the go). But they aren't lower - so that's fine. Pension arrangements and financial wealth is also much the same between the two cohorts.

The one thing that is significantly different is home ownership. A mere 30% of those born in the 1980s have bought their first house by the age of 30. The equivalent number for those born in the 1970s is 55%.


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House prices have been rising, so it therefore makes complete sense that the 1970s cohort had more wealth in their 30s than those born in the 1980s. If house prices now fall dramatically, the wealth gap between the two will reverse. So what's to be done about this?

The first thing to note is that, while the inability of younger generations is largely about price, there are other parts to the equation. On a radio show I went on earlier today [from about 1:14 in], the 30-something brought on with me said that he couldn't save for a house because he was saving for his wedding.

People spend an awful lot on weddings these days. That's a choice. Those in their 30s also eat out twice as much as those in their 50s. Again that's a choice. They are also much more likely to have student loans left to pay down (that's not a choice but it does make saving harder).

Inheritance matters too: the longer people live, the older their heirs are when the wealth trickles down. And there's also the effect of the sharp rises in the actual cost of moving to take into account (stamp, legal fees etc). These tend to mean that people buy fewer houses over a lifetime than in the past. And if you are buying fewer houses you might skip the first step of the ladder - why buy a two-bedroom flat only to have to pay £10,000 in expenses five years later when you need a garden?

All that said clearly very high house prices make it hard for the young to get on the ladder in the first place. So if you want to help those born in the 1980s to catch up with those born in the 1970s, the obvious thing to wish for is house prices to fall (making the 1970s lot poorer on paper and the 1980s lot able to buy).

How? Higher interest rates would be a good place to start.

Please note: This article was first published in MoneyWeek on September 30, 2016.

Merryn Somerset Webb is the editor-in-chief of Moneyweek, the best-selling financial magazine in the UK, and is a director of two investment trusts - the Baillie Gifford Shin Nippon Trust and the Montanaro European Smaller Companies Trust. Before joining Moneyweek, she worked at the Japanese public broadcaster NHK, SBC, UBS, BNP Paribas, and The Week. Merryn has a weekly column in the FT and a monthly column in Saga. She is a regular TV/radio commentator and speaker on financial matters.

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3 Responses to "How a Real Estate Crash Can Help the Youth"

KD

Oct 6, 2016

Everything in the market is dependent on demand and supply. Bank credit growth is very weak. Therefore, interest rates should be reduced. It is only the central bank that distorts the market.

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Ramarao1111

Oct 6, 2016

""How? Higher interest rates would be a good place to start""--Excellent.

Will be great If Equitymaster can facilitate the use f emoji's while seeking feedback etc

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KD

Oct 6, 2016

I want to add that we have huge NPAs in banks. Lot of industry cannot invest. Therefore, very few jobs are getting created. Therefore, we should bail out banks just like western world. This will help young people more than real estate crash.

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