Unpaid internships, zero hour contracts, mortgage lending rules, austerity; they've been called the "lost generation" but do today's millennials really have it tougher than their parents and those who have gone before them?
It's spoken about often – the intergenerational wealth crisis where baby boomers are living it up while their offspring are struggling to make any financial headway. But is it a fair assessment?
Today, in the first of a two-part series on millennials and their money, we consider how difficult it is for first-time buyers today to buy a home; is it, as many people say, actually more difficult to secure for today's "millennials" – typically those born between about 1981 and 1985 – than it was for their parents who bought back in the 1970s, 1980s and even the 1990s? Or is it a case that for baby boomers, born in the post-war years of 1946-1964, sacrifices didn't just have to be made in order to buy a property – they actually were made.
Who lives in a home they own?
Regardless of whether or not it’s more difficult to buy a home today, what is true is that, irrelevant of affordability, home ownership is on the decline as today’s generation of 20 and 30 year-olds postpone buying their first home and spend longer renting.
Home ownership peaked in Ireland in 1991 when a staggering 80 per cent of people lived in a home they owned. But it has been falling since.
In 2011 (the most recent figures available), this had fallen to 71 per cent, pushing Ireland closer to European norms of 67 per cent for EU-15 and 71 per cent for EU-28.
Alongside this, the number of younger buyers has also been on the decline. In 1991, for example, according to figures compiled by NESC (National Economic and Social Council), 16 per cent of those in the under-24 age group owned their own home (with a mortgage), while a further 60 per cent of those aged between 25-34 had purchased a property. This meant that by the time people reached 35, the vast majority were already on the property ladder, with just 5.2 per cent of the population renting from a private landlord. At the time renting, rather than owning a home, was simply not the done thing.
Fast forward just 20 years, however, to 2011 and the figures show that just 6 per cent of under 24s had bought their own home, and 40 per cent of those aged between 25-34. The number still renting in their late 30s/early 40s had stretched to almost 20 per cent.
We won’t have figures for home ownership trends until Census data becomes available in September 2017, but one could expect a further decline in the number of people living in Ireland who own their own home. Muted mortgage lending figures, as well as the over-heated rental market, suggest that more people are renting, rather than buying.
This means that first-time buyers are getting older and are renting longer. Back in 2006, the average first time buyer was 29. Central Bank figures show that the average age of the first-time buyer in 2015 was 34. Clearly, many are older.
With limits on mortgage lending of 3.5 times income, following the Central Bank’s new rules which were introduced in 2015, there’s no doubt that someone on the average industrial wage of €37,097 in 2016 (€61,582 for a married couple) will struggle.
Multiply the single buyer’s income by 3.5 and you’ll get €129,839, which, when combined with a 10 per cent deposit would give a purchase price of €144,266. Enough maybe, to buy a property outside of Dublin, but it’s unlikely to go very far in the capital, where average house prices exceed €300,000.
While a couple has it easier, their income will give them a purchase price of about €239,485 – still not enough in a city where the average sale price was €400,000 in August of this year, according to the CSO.
So are millennials being priced out of buying their first home in their twenties as many commentators suggest – or are they just less adept at getting their finances in order?
Who had it tougher: millennials or baby boomers?
Thanks to data prepared for this article by DKM Economic Consultants, we can consider who found it more difficult to buy a home – today’s millennials or their parents’ generation. And at first glance, it seems that, thanks to soaring house prices, today’s generation have it far more difficult.
Consider someone buying a home nationally in 1974. A married couple, on 166 per cent of average earnings (or gross income of €3,695 a year) would have needed a multiple of just 3.2 times their annual income to secure a second-hand home, which would have sold for an average price of €11,817.
And in Dublin, the income multiple would have been no different, at 3.2 times also.
Moving forward to the 1980s, the situation wouldn’t have changed. Our married couple, still earning 166 per cent of average earnings (€17,404) would have needed a multiple of just 2.6 times earnings to buy a new or second-hand house across the State; or 2.9 times in Dublin.
Single buyers would have found it more difficult at the time – but not excessively so. In 1974, a single person earning the average wage would have needed to borrow 4.9 times their annual income (€2,226) to secure a new home across the country, or 5.3 times in Dublin. By 1984, the multiple would have narrowed, down to 4.3 times nationally, or 4.9 times in Dublin.
Income multiples stayed steady leading up to the boom years, with our married couple requiring an income multiple of just 2.5 times, or three in Dublin, to secure a home in 1995.
By 2000, however, this had jumped to 5.1 times nationally, and to six in Dublin, and continued to rise, peaking at 7.2 nationally in 2006, and 9.9 times in Dublin. Our single buyer would have found it impossible at the time, with a purchase requiring a multiple of 16.4 times their income in Dublin, and 11.9 times outside that year.
But what about today’s generation of first-time buyers?
Well, the figures show that, based on estimated figures for 2016, a couple would need an income multiple of 4.7 times earnings to buy a home around the State, or 6.6 times in the capital, based on the average sale prices of homes in Dublin in August as monitored by the Central Statistics Office.
A single person would need considerably more, and would find themselves priced out of a house around the State (7.8 times income) as well as in Dublin (10.9 times).
So, an income multiple of just 3.2 in 1974 or 2.6 in 1984 compared with 4.7 in 2016? It’s obvious isn’t it? It is much harder to buy a home today.
Or is it?
Impact of interest rates
Now here’s where it gets interesting. When we consider just income multiples, higher house prices and a slower growth in incomes conspire to make it seem much more difficult to buy a home today. But how about if we consider another metric: affordability based on the percentage of earnings required to service a mortgage each month?
This figure takes into account mortgage interest rates, which spiralled in late 1970s, into the 1980s and stayed high until they started to fall around 1994.
Figures from the Central Bank show that the typical interest rate on mortgages peaked at 16.3 per cent in 1981 – a far cry from the rate of 3.5 per cent or so someone can secure today. Yes, a first-time buyer’s grant of €1,270 was available, as was mortgage interest relief – which was worth a lot more than it is today – but it was still a struggle to cope with such high interest rates.
This changes the scenario significantly.
Now consider our couple buying a home nationally with a 20 per cent deposit back in 1975. With a typical interest rate of 11.3 per cent, our couple will give up almost a quarter of their gross monthly pay-check servicing their mortgage, or 40 per cent for a single person.
Move forward 10 years and the couple, with an interest rate of 13 per cent, will pay a similar 25 per cent of gross income towards their mortgage, thanks to strong growth in incomes.
On the cusp of the boom, mortgage rates have fallen, but house prices have risen strongly, which means that a couple buying in 2000 will lose almost 30 per cent of their gross monthly income, or almost 50 per cent if they’re single.
But what about today? Well, in 2016 a couple will give up just 20 per cent of their monthly gross income, or 33 per cent if they’re single.
For those buying in the capital, there’s no real difference between buying now, and in years gone by. Back in 1975, 25 per cent of a couple’s income would have gone on their mortgage, rising to 28 per cent by 1985. This continued to rise during the boom years but had fallen back to 24 per cent by 2015.
Single buyers fare marginally better; 39 per cent of their income went on a mortgage in 2015 compared with 41 per cent in 1975, but 46 per cent in 1985 and a staggering 63 per cent in 2000.
And taxes?
Finally, there’s another consideration that today’s generation of first-time buyers need to consider; income tax. Yes, when compared with the Celtic Tiger years, we are giving up much more of our income on tax. Someone earning €37,000 in 2008 for example, would have lost just 17 per cent of their salary on tax.
But how much did someone earning the average industrial wage back in the 1980s lose to the Exchequer?
Well, according to Keith Connaughton, tax senior manager at PwC, a single person on the average industrial wage back in 1984 (€10,484) would have paid tax at an effective rate of 30.9 per cent. And the tax burden would have risen in line with income growth; at the time, a rate of 55 per cent was levied on earnings over £6,000.
A married couple with a joint income of €17,404 would have done slightly better, but would still have had to give up 27.3 per cent of their salaries on tax.
Today, our single worker on the average industrial wage would pay an effective tax rate of just 20 per cent, while the married couple would have given up 25 per cent of their income – both less than the burden back in 1984.
BUYING A HOME THROUGH THE DECADES
1970s: Credit clamp hits property. "Credit restrictions are the main factor concerned in the drop in sales and have seriously affected the 3-4 bedroom semi-detached in the £3,500-£6,000 bracket.
“Building societies and insurance companies are generally restricting loans to 75 per cent of the purchase price, or twice the applicants’ salary and in only isolated cases can one manage to arrange a higher advance.”
The Irish Times, May 23rd, 1970
1980s: "The availability of 100 per cent finance is, not surprisingly, proving a compelling aid to marketing Gandon Close (priced from £28,250) . . ."
“We find that all the buyers have the salary levels to meet the repayments, but have no money saved for a deposit. The Government’s £2,000 grant should prove especially beneficial to such people.”
1990s: "First-timers struggle to get foot in door". There may not have been any queues, but business was brisk when 100 starter homes went on sale in Co Dublin last week, many of them priced in excess of the psychological benchmark of £100,000.
Within 48 hours of going on the market, all 100 houses initially on offer in the Esker Meadow development near Lucan, Co Dublin, had been snapped up. Almost half were sold before the showhouses opened.
A saleswoman with a computer firm in Fairview, said she had managed to finance the purchase through “hard savings and a few sacrifices”.
Despite reports of mortgage lenders being over-generous, she said she found them “very strict. Since the Central Bank stepped in on the guidelines, they seem to have become a lot more cautious and are sticking to two-and-a-half-times your salary limit”.
The Irish Times, February 6th, 1998
2000s: Meet the first-time buyers. They are the FTBs – first-time buyers in their 20s, with 35-year mortgages and 100 per cent loans. Some have saved for a deposit but most are helped by their parents. And they have no worries about being deeply in debt – for now.
The Irish Times, November 11th, 2006
