Wednesday, 19 November 2008

The Millennials and the New Normal

I have been giving some thought to the interplay between society and the economy over the past week. A pre-publication review copy of Don Tapscott’s new book “Grown Up Digital” has fallen into my lap. I am about half way through the book, which presents an impressive body of research on the ‘NetGen’ cohort (also known as ‘Gen Y’ and ‘the Millennials’), and is likely to dominate our conversation about this generation for some time to come. It tells of how the Internet has affected the way in which this generation interacts with each other and the world. As I was reading the book, it occurred to me that the current economic crisis will also become a formative experience for this generation.

Whilst we tend to focus on high level, exciting aspects of generational interplay, such as careers and jobs and sexy technology, it is the more mundane aspects of life that prove to be more important. I was reminded how such a routine subject such as housing has changed within a couple of generations. When I was a young man, it was common for young people in their late teens and their twenties to ‘save up’ for a deposit on a house. We all aspired to home ownership and it was within the reach of most of us in terms of the affordability of a mortgage and the affordability of the price of housing.

What wasn’t freely available was the finance to purchase the housing. It was quite common to join a queue for a mortgage whilst saving for a deposit to buy the house. Mortgage finance was reasonably limited and offered on conservative terms. It was not uncommon for a deposit of 10% to 20% of the purchase price to be required, and the maximum loan multiple would be 2.5 times annual salary.

The Thatcher Revolution changed all of this. With the sale of council housing to tenants, the number of house owners increased dramatically in a short space of time. The whole housing market became larger. The de-regulation of the financial markets in the mid-1980s also made finance much more freely available than it had been previously. The result of this was a general increase in Loan To Value (LTV) rates as the deposits required for purchase fell along with a general increase in the salary multiple as it became easier to raise loan finance. With so much liquidity entering the housing market (and a relatively fixed supply of housing in the very short term), the inevitable happened – house prices rose, despite a setback in the housing market in the early 1990s.

This had a profound effect on the behaviour of young people. As they no longer needed to save for a deposit on a house because of rising LTV rates, they didn’t. As many of them became priced out of the housing market as first time buyers, they stayed at home longer than their parents had at their age. Strong growth in the economy kept earnings buoyant, which resulted in a significant increase in the discretionary disposable income of this age group. One aspect of this is what some observers call the drunken mayhem in British town centres at the weekend. The ‘Binge Drinking Culture’ is as much a result of loose monetary policy as anything else!

And now that has changed. The disruption in the financial markets has caused the property market to grind to a halt. The reduced number of property transactions is causing acute financial hardship for those who make a living from handling property (estate agents, solicitors, mortgage brokers, etc). This has a knock on effect for those trades ancillary to the property market (furniture makers, builders, curtain makers, etc), and is now leaching into the wider real economy. As this happens, households traditionally shore up their balance sheets (borrow less, save more), which is already being felt in sectors such as pubs and restaurants.

However, there is an upside to this, particularly for the NetGeners. The falling price of property has made housing more affordable for them. As long as they remain in work, current conditions represent one of the best opportunities for years to purchase property. However, credit conditions are such that mortgage finance is not as readily available. LTV ratios are falling along with salary multiples. If these monetary conditions remain for an appreciable period, we may see saving become a ‘cool’ activity as the NetGeners look to raise a deposit for a property.

To a certain extent, this might mark the end of the Thatcher Revolution, which was based upon cheap money and freely available credit. If the New Normal turns out to have much more restricted credit terms - and fewer ‘funny money’ financial instruments – then we could see a return to ‘save and wait’ as a way of purchasing property, which is a reminder of my youth.

I always told my children that, one day, they would end up like me!

© The European Futures Observatory 2008

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