48: UK wealth and cultural differences within the age groups – investors take note
11-19-2005
Baby-boomers: The post war generation of baby-boomers (more 1946 to 1962) were bought up in an austere post-war environment of rising unemployment, closing of heavy industry and increasing competitiveness. Many, taught by their parents, did not take anything for granted and worked hard to get themselves up the social ladder – out of the slums, into the middle-classes. This all sounds rather historical and old fashioned, yet this psyche led to rapidly increasing wealth, living conditions, deposable incomes and retail spending. The Thatcher years created a bunch of hard working, keenly competitive workers – aspiring to climb a social/wealth ladder. Increasing borrowing led to the current sustained housing boom over the last ten years – where prices have tripled. Most of this wealth of some £1 Trillion now resides with the baby-boomers. Some of these even went into buy-to-let, helping to drive asset prices further up – and out of reach of the younger first time buyers. Many of these younger generation have now been forced to rent because of the high costs of stamp duty, deposit, fees and mortgage payments on high capital borrowing.
iPod Generation: Many of the younger population have experienced their parent’s developing wealth at home and may assume similar wealth will come their way in due course. They may also think they have a nice safety net in case of financial hardship – essentially, their parents either subsiding their accommodation or living expenses, or bailing them out if they experience any self induced financial hardship. Some might believe they can leave home later, stay at college longer, delay getting permanent employment, delay getting married and delay having kids – essentially, delaying anything that means they have responsibilities. This is worth point outing because 25 years ago, the “norm” was to leave home at 18 years old to either get a job or start college. If you went to college (only 8% did, compared to 25% today) then one generally came out at the age of 21 and immediately started a “career” having no student loans and a debt of say £1,000 often from too much student drinking – you might be married by 25 and have kids by 28. These later baby-boomers thought they were old starting a family at age 28 – in part because their parents went to war at 18 had five kids by 30, and their grandparents started work in factories at age 13.
The new “norm” might be – going to college after a gap year for a 4 year sandwich course, raking up student loans and debts of £20,000 then taking another year’s travel before trying a few jobs out before settling on a vocation. Marriage may never come, kids might arrive at 35-40 years old, and jobs might change every few years. One might not leave the parents home until after college – in view of the substantial debt burden. and cost of housing.
Analysis: So is it any wander there are so few first time buyers. The baby boomers have stolen a march on the younger iPod generation - the explosion of property related wealth/equity is predominantly in the hands of the over 40 year olds. The iPod generation have very little equity, and much debt. On November 17th 2005 they were told they would not receive a state pension until they were age 67 (for anyone retiring after 2020). Meanwhile, the current baby-boomer public sector workers the same week were advised they could continue to retire at age 60 with full state pension (48 if you are a policeman, 50 for a fireman). Because the iPod generation are not too interested in pensions at present, and many don't care about politics, they might not have noticed this change. I would not envisage the iPod'ers loosing any sleep over something that will happen in 15-35 years time – anyone under 45 will be affected. And women more than men because retirement after 2020 will be 67 for both, rather than 65 for men and 60 for women – so the women will be working 7 more years before they have a state pension. Many will be single, so this issue will be likely more important than if they were married.
Changing Demographics: Meanwhile, there has been a dramatic increase in immigration from all countries – eastern Europe in particular. Most of these people are young, work hard, and find it difficult to purchase properties because they are often not eligible for a
Why is this interesting for the property investor?: As mentioned in other parts of PropertyInvesting.net – it’s critically important to follow the trends. Investors can benefit from the below trends – by servicing this demand:
- Increasing demand for rental accommodation as immigration increases, first time buying stays low, population increases, employment in London/SE expands and fewer houses are built
- Increasing demand for small one and two bedroom houses and flats in SE England – close to London jobs and communications/infra-structure
- Suppressed demand from first-time buyers for property – however, any property in good employment areas which is affordable on an average salary of say £25,000 will likely edge higher
- Conversion of small retail shops into residential flats for letting
The other interesting dynamic is that many of the iPod generation tend to avoid responsibility and might not have the hunger to progress to improve their wealth like their parents did (some of this psyche was developed in the Thatcher years) – they might value flexibility, freedom, individualism, travel and having a good time far more than the older generation – whether this changes over time remains to be seen. If it continues – the baby-boomer generation will develop into the landlords, and younger generation the tenants. The younger generation may choose to be tenants because they do not aspire to own property – and prefer not to have the responsibility to service a mortgage and do maintenance – with all the risks that go with owning a home.
iPod Generation Economics: For the residential property investor, this is why it is so important to focus on high rental yields – because one cannot assume prices will continue to rise, particularly if the younger generation prefer to rent and asset prices are on a “high plateau”. I could envisage a situation where, despite the expanding population and shortage of housing, property prices do not go up significantly because the younger generation prefer to rent. Rental prices would rise instead. The iPod generation might think:
- Why should I take the risk of buying a property if there is no capital reward?
- Why not spend the money on a nice holiday instead?
- It’s too late to try making money from property because the baby-boomer have cornered the market and left us high and dry!
- I don’t want the responsibility in any case – does anyone know how to change a light bulb?
- I’ll have to wait until my parents gift me their property – or they offer to help out.
- I’m too busy trying to stop my debit burden from expanding, never mind thinking of buying a house!
With an economic scenario that an average
- £20,000 in student loans
- £5,000 in personal loans
- £18,000 cost of a wedding to look forward (
- £25,000 gross starting salary
- £5,000 cost of renting a small property per annum
- 22% income tax bill, £1000 council tax, £1000 utilities, 12% national insurance, 17.5% VAT, 75% petrol taxes, car bills, bus/train/congestion/parking charges etc
..is it any wander why there are no first time buyer left when they have to put down:
- 5% deposit on £120,000 property - £6,000
- Stamp duty 1% on property over £150,000
- Fees of some £1,500
- Furniture, maintenance etc costs
To pay off student loans, and save for a property could take ten years – little wander these same educate people are having less kids and later. If you have no equity now, it’s going to be very difficult to get it in the future, unless you invest wisely to clear this debit burden – with all the risks of investing yourself out of debit.
BabyBoomer Generation Economics:
For comparison, 25 years ago, the average
- no student loans
- £1,000 in personal loans
- £2,000 cost of a wedding to look forward (
- £10,000 starting salary
- £1,500 cost of renting a small property per annum
- 22% income tax bill, no council tax, £300 utilities, 2% national insurance, 17.5% VAT, 50% petrol taxes, car bills etc
..is it any wander why there were so many first time buyer when they have to put down:
- 5% deposit on £35,000 property - £1,750
- No stamp duty
- Fees of some £200
- Furniture, maintenance etc costs
These same people had more money to spend in the shops, holiday, investments, savings, hobbies and developing businesses. Any investment earned returns without being saddled with a huge debit burden. This gave the baby-boomer powers of leverage, which was further multiplied by rising asset prices and equity release.
Massive Transfer of Wealth to Babyboomers: So the boom is over, the baby-boomer have captured the property wealth and the iPod generation are saddled with debt, longer working years, a pension black hole, high taxes and paying for a hugely expanded public sector workforce who retire at 60 on big pensions and cost billions in health care into old age. They will be relying on the baby-boomers to provide rented accommodation or selling them their property at high capital prices – thereby further transferring wealth from the iPod generation to the baby-boomers. The iPod Generation will spend time paying off debts, working until age 67 and hoping their is still a state pension in 30 years time - with the threat it is scrapped or further eroded in the meanwhile. Some of the most entrepreneurial iPod generation will prosper off the back of internet businesses, services and ideas – but for most, it looks bleak. The baby-boomers will retire at 60 with their cash piles to southern