🔑It’s Been Getting Harder and Harder to be First-Time Buyers. Here’s Why this Could all be Changing Now!

Asset prices from stocks to bonds to real estate went on a 40-year honeymoon. Their prices went to the moon which meant those who owned properties (or several!) enjoyed the lovely-and-very-positive wealth effect (cough, cough boomers) that comes along with it. We feel rich when our assets go up in price. It’s that simple. No one wants to go out and buy stuff when their portfolio has taken a beating – much like now, infact! 

This has made it a gazillion times harder for the younger gens (that’s us lot) to build a stock portfolio (at normal-ish prices, that is) in addition to buying a house. For those of us who can afford to invest in these assets, we were forced to buy stuff on the expensive. Unfair, you may say, but you can’t time these things I’m afraid! And of these two, I think the most damaging has been the asset price inflation we’ve seen going on within the housing market. 

Let’s go back to the beginning!

For the past 40 years or so, since inflation was so low (sub-2% which is the central banks’ target btw) this meant that interest rates were equally low as there was no need to cool-off the economy as it wasn’t exactly piping hot. Or anywhere close to it. Thanks to resources (like labour), costs were kept down. One of the effects of ultra-loose monetary policy (aka low interest rates) is high(er) house prices. Since debt (or in this case, a mortgage) became so cheap to own it meant that it became more and more affordable to buy a property and get on that coveted proverbial property ladder. 

This was great for buyers since they could actually afford something (other than a dingy studio!) and meant their debt burden was manageable. This meant that demand for bricks and mortar began to rise. And prices started going up. And the price-out begins. In the early 2000s, with rates still low by historical standards (they were ⅓ of what they were back in the ‘80s) plus whopper levels of greed and thus risk-taking which was all made possible thanks to little (to no) regulation, we find ourselves in ‘08. When the house of cards came crashing down and many found themselves without a job, or worse – without a home. 

And do you know what happened next? The Fed slashed rates to 0.25%, the lowest in its 232-year history. Since then, house prices recovered – and then some! That’s what they wanted though, right?! Fast forward a decade-and-a-bit and you have covid. Rates were slashed once more. And house prices went berserk. In the US, house prices rose by 30% since 2020, reaching an all-time-high in September 2021. 

An entire gen, priced out.

Sorry for the spiel – back to the current day! Basically, house prices have become so high over this past decade that an entire gen found themselves completely priced out that they were forced to rent for a lot longer and now they’re doing so with higher levels of rents thanks to stupidly high levels of inflation we find ourselves with.

To prove that house prices have only been going in one way (up) is by taking a look at the average age at which we’re buying properties. And guess what the data shows us? It’s been going up. Back in 1981, people bought their first property at 28 or 29, on average. It’s now 33. This might not seem like a biggi to you. What’s an extra 4 or 5 years of renting in the grand scheme of things? A lot, infact! 

For many, it means postponing starting a family (a rental accommodation doesn’t exactly scream security for a kid or a parent) and it also means the added stress of having to spend more of your money on rents when all you wanna be doing is paying off your own mortgage for your own home instead of filling someone else’s coffers, which brings me onto my next point: the older you are when you buy your first home means that you’ll be paying off your mortgage until later on in life.

The average length of a mortgage in the US is 30 years so someone who buys a house at 33 will be paying off their mortgage close to retirement. This leaves them with less money to build their pension and means their retirement could be delayed. So, this 40-year honeymoon effectively shoved many buyers outa the housing market and forced rents upward since affordability went through the roof. Nice, huh! 

Now we’re seeing this narrative slowly reverse

The thing with trends is when they’re starting out, you don’t often see them as such, only when they’re fully-grown. So here’s me hoping, wishing and praying that this will be a full-on trend of house prices cooling off, and even going down. Imagine that! US house prices rising by ~30% in these past 2 years is not normal. And should not be thought of as such. And the only way (or at least the most effective – we’ll get to another solution later) to stop this is to have higher interest rates, which is what we’re seeing right now. And judging by Powell’s hawkish tone at Jackson Hole last week, I can only imagine we’ll be seeing higher rates a little longer than markets, or anyone really, wants to believe!

The cost of money can’t – and shouldn’t – be nil

Listen up though, moderate interest rates is something we should be embracing, not running away from! It’s not the bad monster that most make it out to be. Of course it’s nasty for those on variable rates and they’re seeing their monthly bills double (or worse!), no one’s arguing that, but think about those who are yet to buy their property. Prices will start to come down as it becomes harder and harder to service mortgages, finally allowing folk like millennials who had the double-whammy of graduating in ‘08, during one of the worst financial crises, and then to find themselves here – with house prices where they are thanks to super-loose monetary policy and endless stimulus stuff.

These guys should be owning their houses by now. But only 47.9% of millennials own their home owns, vs 69% for gen X and 77.8% for baby boomers. When you put it like that, the picture is quite grim. And my gen, gen Z, also doesn’t want to be renting all our lives as we watch with envy at our older gens sitting on their properties watching them swell in value. 

For the past 4 decades, and more recently, the past 2 years, we’ve had a period where money had zero cost attached to it (interest rate = cost of money) which encourages exuberant behaviour. People were able to load up on debt like candy since they were paying peanuts in interest. And voila, prices go so high that you have an entire gen who can’t buy their first house. So, yeah, I’m all for higher interest rates. 

The other tool to help bring property prices down

But higher interest rates aren’t the only thing that’s going to act as a downward pressure on house prices. Recessions also help.

Hear me out: in recessions, unemployment typically rises (though we’ve not seen this yet, making this the weirdest recession ever. Read here all about that) which means people lose their jobs and often have to downgrade or at the very least that’s not when they’re going to upgrade their house to some even bigger bricks. No way.

Recessions are periods of of downgrading, of contraction, not one of expansion. And right now, as we enter this very odd and confusing recession, house prices are already slowing down.

In the US, new homes’ sales are collapsing. which means sellers are struggling to find buyers. The result: prices gotta be slashed otherwise they won’t shift. It’s a marketplace like any other! 

For all you yet-to-be-first-time-homebuyers, sit tight. And build. Do not be afraid to take advantage of market lows, when they come about. 

‘Cause something’s telling me they’ll come. 

We’ll be holding those house keys one day soon! 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.