Thursday, 17 August 2017

The Unfairness of the Grantham Baby Boomer’s £1,157,000,000 windfall? (Part 2)

Grantham Baby Boomers vs Grantham Millennials

Well last week’s article “The Unfairness of the Grantham Baby Boomer’s £1,157,000,000 windfall?”caused a stir. In it we looked at a young family member of mine who was arguing the case that Millennials (those born after 1985) were suffering on the back of the older generation in Grantham. They claimed the older generation had seen the benefit of the cumulative value of Grantham properties significantly increasing over the last 25/30 years (which I calculated at  £1.15bn since 1990). In addition many of the older generation (the baby boomers) had fantastic pensions, which meant the younger generation were priced out of the Grantham housing market with very little in the public pot to sustain their futures!

I replied there should be no surprise though that the older members of our society hold considerably more of our Country’s wealth than the younger generation. This is wealth which  has accrued across someone’s life, and reaches it’s peak usually at the point of retirement. If we are to comprehend differing wealth levels between generations we need to compare ‘apples with apples’. It is much more relevant to track the wealth held by different generations at the same age, ie what was ‘real’ wealth of the 30 something couple in the 1960’s compared to a 30 something couple say in the 1980’s or 2010’s.
Looking back over the last 120 years from various economic studies, the growth in wealth from one generation to the next one only occurred during a 30 year period of between 1960 and late 1980’s. Since the 1990’s, wealth has not improved across the generations, in the same age range.

Significantly in the last 10 years, UK households have saved on average 7.5% to 8% of the household income into savings accounts, compared to an average of 6% to 7% in the late 1960’s and 1970’s. The baby boomers haven’t been actively squirrelling away their cash for the last 30 or 40 years in savings accounts to accumulate their wealth. Most of their gains have been passive, i.e.  lucky bonuses gained on the back of massive property value rises or through their generation naturally living longer thus making final salary pensions more valuable!

..and herein lies the issue … it is assumed that these Millennials aren’t buying property in the same numbers like the older generation did in the past (because most of their wealth has come from house price inflation). The Millennials have often been described as ‘Generation Rent’, because they rent as opposed to buy property – because we are told they cant buy.

However, when Grantham mortgage payments are measured against monthly income, home ownership is affordable by historic standards because mortgage rates are currently so low. As you can see, the ratio of average house price to average earnings in Grantham hasn’t vastly changed over the last decade …

  • ·      2008 average house price to average earnings of a single person in Grantham  7.24 to 1 

  • ·      2017 average house price to average earnings of a single person in Grantham  8.38 to 1

(ie in 2008, the average house price in Grantham was 7.24 times more than the average person’s salary in Grantham and this has only risen to 8.38 in 2017 – and all this off the property boom of the early 2010’s)

95% first time buyer mortgages were reintroduced in 2010. The average interest rate charged for those 95% FTB mortgages has slowly dropped from around 5.5% in 2009 to the current 4% rate. However back in the 1980’s/ 1990’s mortgage interest rates were between 8% and 10%, and one time in the early 1990’s, reached 15%! The main difference between the two periods was the absolute borrowing relative to income is greater now than in the 1980’s. They call this the ‘mortgage to joint household income ratio’. In the 1980’s the mortgage was between 1.8x to 2x joint income; today it is an eye watering 3.4x to 3.6x salary.

The simple fact remains for the majority of first time buyers, it is still cheaper for them to buy a property with a 95% mortgage, than to rent it. The barrier for these Millennials is not servicing the monthly mortgage payments but finding the minimum  5% mortgage deposit in the first place.

Millennials make up 7,824 households in the South Kesteven District Council area (or 13.6% of all households in the area).  However, behind the doom and gloom, surprisingly, 40.2% did save up the 5% deposit and do in fact own their own home (that surprised you didn’t it!)

Nonetheless, the majority of Millennials in the area still do rent from a landlord (3,272 Millennial households to be exact). Yet, they have a choice. Buckle down and do what their parents did and go without the nice things in life for a couple of years (ie the holidays, out on the town two times a week, the annual upgraded mobile phones, the £100 a month Satellite packages) and save for a 5% mortgage deposit .. or live in a lovely rented house or apartment (because they are nowadays), without any maintenance bills and live a life with no intention of buying (because renting doesn’t have a stigma anymore like it did in the 1960’s/70’s. (secretly hoping their parents don’t spend all their inheritance so they can buy a property later in life – like they do in central Europe)

Neither decision is right or wrong – although it is still a choice. Until Millennials decide to change their choices – that is the reason why the Country’s private rental sector will continue to grow for the next 30 years – meaning happy tenants and happy landlords.