Eight financial things that are different for millennials

Tuesday, 16 April 2019

If New Zealand's playing a 2019 version of the Generation Game, the jury's out on who is winning.

Millennials trying to start families and buy houses blame baby boomers for driving up property prices and using untaxed capital gains to build investment empires.

Some older people say the younger generations would get ahead faster if they just cut down on their spending and swapped their time on Instagram for time behind the desk at work.

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But it's clear that things are different for those trying to get ahead in 2019 compared to 1980.

Here are eight key differences.

HOUSE PRICES

The quickest way to induce nausea in a house-hunting 20- or 30-something is to show them the price they would have had to pay for that same property 40 years ago.

In 1980, the average house price in Auckland was less than $65,000. In Wellington, it was about $45,000.

In the late 1970s, house prices fell in real terms as inflation took off. Overall, between 1965 and 1984, real house prices grew at a rate of 1 per cent a year.

Claire Matthews, of Massey University, said while houses had always been relatively expensive, the cost is greater relative to incomes for young people today than it was for baby boomers. House prices are now about five times incomes - more in Auckland, compared to three or three-and-a-half times.

That is reflected in home ownership rates. In 1986, 75 per cent of people were living in an owner-occupied home, compared to 64 per cent in 2013.

Economist Brad Olsen, of Infometrics said that meant young people now were paying rent for longer 'that is, paying someone else's mortgage while trying to save for their own.'

But buyers now have more options for finance and getting a loan is a more straightforward process.

While their parents might have had to take out a second or third mortgage from a solicitor's trust account to get a deal across the line, most buyers with enough equity can get a mortgage from a bank.

Matthews says there are more mainstream finance options for Gen Y buyers than there were for baby boomers.

GOVERNMENT ASSISTANCE

Economist Ryan Greenaway-McGrevy, from the University of Auckland Business School, said baby boomers started out in a time when there was a government focus on redistribution of wealth towards the less well-off.

Families would receive a benefit per child, which they could choose to let build up to form a deposit for a first home.

He said the government would also help with home loans to those who qualified.

Now, there is less of that structure - you might qualify for Working for Families if you have kids, but the income thresholds are not high.

INFLATION

In 1987, inflation hit 18.9 per cent. Now, it's 1.9 per cent.

The lack of inflation means that the value of debt is not eroded. Half-a-million dollars borrowed five years ago still feels more or less like the same amount of money. But if inflation was moving at a rate of 18.9 per cent, the loan would feel like it was worth almost a fifth less in real terms each year.

It's never been easy to buy a house but experts say it's harder now than it used to be.

ASB chief economist Nick Tuffley said people who bought a house in the 1980s saw the nominal value of their house increase quickly, while their debt did not. Wage growth was strong, so while it was tough to initially get into a house, servicing the debt quickly became easier. Now, people have a much longer wait before their wages rise to the point where paying a mortgage feels less arduous.

That inflation experience had influenced baby boomers to favour property investment, he said, because they had seen their debt effectively reduced while inflation and capital gains pushed up the value of the houses they owned.

Younger people might have wider investment preferences, he said.

INTEREST RATES

But a consequence of all that inflation was high interest rates.

Interest rates are one factor that seem to be on the side of the millennials. They are at historic lows, which is great for borrowers but not so good for people who have money in the bank and want an income from it.

In 1980, mortgage interest rates were about 15 per cent – and climbed over the rest of the decade.

Now, you can lock in a rate below 4 per cent if you have equity of 20 per cent or more in your house.

STUDENT LOANS

Some students are now getting the first year of their tertiary study free, but student loans are still a factor for most.

In 2017, 170,037 students took out a loan. The average student loan balance in the year was $22,065.

Olsen said student loans were not a factor for baby boomers.

'Some courses also paid boomers to take part - for example, those at teachers' college often got a stipend.'

He said, over time, it had become more important to complete further education.

When inflation hit in earnest from the mid 1970s until the late 1980s, the value of money fell rapidly.

'boomers often didn't need to go onto further study: they were able to find good, well-paid jobs without qualifications. Over time, the proliferation of higher qualifications has led to 'degree inflation', where to get a job you now require a higher level of qualification than before.'

OPEN ECONOMY

Political changes in the 1980s meant that some things became easier – many more people now travel and work overseas, it's easier to get foreign currency and to purchase things from other parts of the world.

Baby boomers talk about sitting on boxes because they did not have furniture – but a more open market means that the same furniture is now much cheaper for their children to purchase.

EXPERIENCE OF DOWNTURNS

While baby boomers might have been burnt by the 1987 sharemarket crash, many young investors are in an environment in which they've never seen a real slump in share prices.

'Many baby boomers either remember the war years and/or the Great Depression or have memories based on their parents' experiences of those events,' Matthews said. 'This influences their financial behaviour.'

PAYMENT TYPES

For those who remember getting cash out of the bank to make it through the weekend, or writing cheques at the supermarket, change has happened quickly.

Matthews said younger people were used to having access to banking services and their money all day every day.