David McWilliams, the outstanding Irish economist, recently said something on a podcast episode that got me thinking. “For the first time in many generations, today’s youth expect to be poorer than their parents.”
In a world where technology is improving at the speed of light and where productivity has gone vertical, that’s a wonderful statement. And yet, given what has happened to property prices in recent decades, it is not surprising to hear this expectation.
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There is no better medium to express this generational conflict than the housing market. I came across the following chart last week via longtermtrends.net, which assesses the affordability of housing in the UK. When comparing the median UK house price to median annual income, the ratio is now above 9, which was higher than before the Great Financial Crisis in 2008.
This article is not meant to say that a housing crash is coming, mind you I did a report on that back in April. In short, while there has been some weakness in the market recently and prices may well continue to slide, it is difficult to draw any conclusions from the underlying data that an outright crash will occur. Supply and demand are out of control, which helps provide a basis, while variable-rate mortgages have declined and other factors have changed since 2008, meaning the GFC isn’t even a fair comparison.
UK inflation highest in Western Europe
But the statistics show just how difficult it is to be young in today’s economy. The UK is currently experiencing some of the highest inflation in Europe, which continues to remain in the double digits. While this is expected to come down before the end of the year, the Bank of England recently said it does not expect to return to the 2% target before 2025.
This makes it difficult to gain a foothold on the wealth ladder as one’s disposable income is reduced by increased expenditure on everyday items including paying rent. The ability to save is reduced, which means it becomes more difficult again to buy a house in the future.
The world has been like this for a while, especially in the big cities, because the supply of housing has not kept up with the demand. The graph below is a very crude way of showing this in the US, plotting population growth against the supply of new homes, but it is indicative.
The younger generation is being squeezed
Going back to the main graph of this article, the best way to plot home affordability is to simply plot median home price versus median income. We showed earlier that this ratio is now higher than it was in 2008. However, zooming out to cover the last hundred years shows how historically high this is. The ratio is more than 9 today: it peaked at 7.45 after World War II, up from 4 before the war, amid the post-war housing shortage.
Apart from brief spikes in the early 1970s and late 1980s, it ranged between 4 and 5 until the new millennium, when things started to go wrong. It stood at 8.6 before the crash in 2008, then dropped to 6.9, before rising slowly and steadily through 2013, now above 9.
This past decade has, of course, coincided with basement-level interest rates and an unprecedented amount of quantitative easing (at least until last year). While we are talking about the UK in this article, in the US plotting the Fed’s balance sheet is a classic, if not cliche, way of showing it.
This has sent asset prices to dizzying levels. That is, if you do not own any assets, you have not benefited from increases in the prices of these assets, while you suffer from increases in the prices of everyday items such as food, energy and rent.
But housing is a big part of it. Without a viable way to get home, it is very difficult for young people to save and accumulate money. For the older generation, “your home is your pension” is an oft-repeated phrase. Looking at how prices have risen in recent decades reinforces this.
And yet today, unless you get help from your parents, it is very difficult to buy a house at the age of 20. Not only this, it is also extremely difficult to get work done in your 30s. This has not been the case in comparison to previous generations.
As the median household income ratio tops 9, the highest in 100 years, times are tough for young people.
