More and more young people continue to live with their parents, even after they become adults. This headline has become quite common in many countries worldwide, especially after the last economic crisis in Europe. But it also applies to so many other countries, and not just during times of crisis. When housing prices are so high, it’s not only in Israel and Italy that the millennial generation feels lost.
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A poll by the Pew Research Center last July found that even though the U.S. job market had improved, millennials were not letting go of their mother’s apron strings so quickly. True, the convenience of the laundry-catering service is one explanation. But it’s more likely that living with parents has become the default choice for those who cannot afford to live on their own.
The high cost of buying a home is one factor, but rental prices are the more important consideration: These have been rising steadily since the big global crisis of 2008, and in most places now, prices are well above those before the crisis – while salaries have not kept pace.
The research, based on an analysis of U.S. census data, found that in the first quarter of 2015, 67% of U.S. people between the ages of 18 and 34 (42.2 million Americans – known as millennials for the purposes of the Pew study) lived separately from their parents. This may sound like a lot, but in 2007, just before the 2008 blowup, 42.7 million people in the same age group lived apart from their parents.
The numbers may look similar, but from 2007 to 2015, this age group grew by 3 million people. The question, then, is why the number of millennials living at home with their parents is growing rapidly at a time when unemployment rates have fallen.
The situation in the United States is better than in other OECD nations in this regard. The OECD’s Better Life Index in 2015 showed that spending on housing in the United States reached 18% of income. These calculations include many factors, such as rental prices, the cost of buying homes and mortgages, repairs and maintenance, and other expenses such as electricity and water bills. The average spend for developed nations was also 18% of income, while in Israel it reached 21% – placing it in the middle of the rankings. The countries with the highest relative expenditure on housing were Slovakia and the Czech Republic, at 26%.
The National Association of Realtors in the United States publishes its Housing Affordability Index every month. An index of 100 means a family earning the median income has exactly the ability to afford an average home. The higher the index, the greater the ability to buy a home. In other words, an index of 150 means the median family has enough one and a half times the necessary income to buy an average home in the United States.
This is a relatively new index, which was launched in January 2013 when U.S. housing prices were still low because of the economic crisis. At first the index reached 214 points – meaning the average family had over twice the income required to buy an average home. By March 2016, though, the index had fallen below 170, and the index usually falls lower during the summer. This means American families are finding it much harder to buy homes now.
Hard to find homes for under $1 million
U.S. housing prices have recovered, and have passed their previous peak during the real-estate bubble of 2007. In many metropolitan areas in the United States, which have excellent job markets, it is hard to find a home to buy for less than $1 million.
In May 2016, over 190,000 homes in San Francisco cost over $1 million – 57% of the entire housing market in the city, three times the amount of only four years earlier. San Francisco’s outrageous prices may be explained by it being flooded with people earning high-tech salaries, and the city still has the highest level of such high-priced homes. But it is not alone.
The number of million-dollar homes in the United States has reached 2.2 million – double the number in 2012 – because of rapidly rising prices in large cities, reports the Trulia real-estate website. Two-thirds of these homes are in just 10 metropolitan areas. The city with the most homes in this price range is Los Angeles (291,000). New York City, San Diego and Long Island are other centers for million-dollar-plus homes.
The Zillow real-estate website says the median price for a home in San Francisco climbed by 67% from March 2012 to March 2016, reaching $806,000. The median price of a home in Las Vegas, which has 6,600 homes priced at $1 million or more, jumped 76% in the same period, and reached $203,000.
The new 1% “mansion tax” in New York, which applies to sales of at least $1 million, has caused many investors to limit their offers to $999,999 – even though it is nearly impossible to find a large home in New York at this price.
So it should be no surprise that the percentage of people renting is at a record level in the United States, and it’s becoming harder for even the middle class to afford renting, reports a study from the Joint Center for Housing Studies at Harvard University. More and more families are renting today: 43 million families and singles were renting in mid-2015, compared to 34 million in 2005, the study found. This is the sharpest rise ever over a decade, the authors say.
The report states that a direct link exists between the 2008 financial crisis and the increase in the number of renters: 8 million homes have been repossessed because of debts to the banks since the level of home ownership reached its peak in 2004. But during this same period, real household income has shrunk back to the levels of 1995. And at the same time, rules have been tightened and it’s much harder to get a mortgage.
The most worrying figure in the Harvard study concerns the ability of the middle class to pay its rent. Even those whose annual income reaches $45,000 – the lower limit for the middle class – have a hard time being able to pay rent in many cities. Families that have annual incomes of $30,000 to $45,000 a year spend at least 30% of their income on rent, and this only gets worse as income levels drop, says Chris Herbert, the director of the housing studies center. This leaves families facing a vicious dilemma: To buy food and medicine, or to pay the rent, he says.
Of course, the situation in some U.S. cities is very different – for example, it is much easier to buy a home in Cleveland and Detroit. In these cities, the average home price is 1.26 times the median annual disposable income. In Tel Aviv, this ratio is 18.9 times median disposable annual income. Beijing, London, Mumbai, Hanoi and Hong Kong have the highest ratios, reaching 37.6 times the price of an average home.
To put the rise in housing prices in perspective, in Hong Kong and Australia prices more than tripled between 2000 and the first quarter of 2016. During the same period, housing prices n Israel also rose steeply, though they were still less than twice as high after 15 years.
But if we look at the Israeli housing market from a different perspective, the picture changes dramatically: In Europe and the United States, prices collapsed. The Economist index shows that Israeli housing prices more than doubled from the end of 2005 through the end of 2015, and Israel showed the steepest rise in prices over that period. While prices rose 62.5% in Israel during that time, in the United States they fell (in inflation-adjusted prices) by over 20%. In Canada, which had the second-highest increase, prices rose over 47%.
In 14 out of 31 countries examined by the International Monetary Fund, housing prices rose faster than incomes, with New Zealand, Austria and Germany showing the fastest-growing gaps in affordability. This gap increased in Sweden, Luxembourg, Estonia and Britain faster than in Israel, too.
A report from the McKinsey global consulting firm from 2014 showed other worrying numbers, with 330 million households at the time living in substandard housing conditions, as well as suffering from economic hardship because of housing expenses. Two-hundred million of these households lived in developing countries, but over 60 million households lived in developed nations such as the United States, Japan and Australia, and in Europe.
McKinsey forecasts that if this trend continues, by 2025 some 440 million urban households – some 1.6 billion people – will live in such conditions. So it’s no surprise that so many millennials are still living at home with their parents. The important question is whether they will ever have a real chance of owning their own home, or whether they really are a lost generation.