Millennials: Breaking through financial barriers

By Nina Cuturic

Faced with their own unique set of pressures at a time when house prices have risen faster than incomes, millennials’ prospects of purchasing a home has stalled. Staying at home has become necessary, for those able to. But how has time and chance played a part? And what’s the next viable step for youth wanting to take hold of waning property prices, and make the shift from renter to owner?

Out of 337 millennials surveyed by Deloitte last year, only 39% indicated they would fare better than their parents and 35% believed they would be happier. And when asked about the future, only 31% put faith into the nation’s economic situation improving over 12 months.

Those figures are just ‘The Australian Cut’ of Deloitte’s far reaching study that uncovered the general mood of youth across 36 countries. And what are the overarching feels?

A cloud of low confidence circulates around their finances and prospects of home ownership.

In fact, Australian millennials listed income inequality, wealth distribution and unemployment amongst their top 5 concerns in Deloitte’s survey, with similar results flagged in research conducted by the Committee for Economic Development of Australia (CEDA).

“Last year we undertook a nationwide survey on the issues that were of greatest importance to the community, and younger people were generally more worried about stable and affordable housing and clearly you can see why that’s the case,” the chief economist of CEDA Jarrod Ball reveals.

Clear employment opportunities were also an issue of greater priority for younger Australians in the survey.

“When you look at concerns around affordability for people looking to get into the market, the upfront costs in terms of the deposit and stamp duty, they are significant,” Ball says.

However, according to the chief economist, the big challenge in the last two decades has been the disparity between house prices and wages, with real house prices growing much faster than real wages until the recent turn in the property market.

“If [millennials] don’t have optimism about increasing incomes, that dampens peoples spirits and adds to the anxiety around making that first big initial investment in property,” Ball says.

Why are younger generations facing higher hurdles to their first home?
“Wages growth has been very slow and income growth has been pretty much stagnant. So real incomes have been basically flat-lining for a number of years,” Ball says.

“That is obviously the here and now of what households are experiencing. It is the basis on which [millennials] make decisions and how confident they feel about their futures – so there clearly is an issue there.”

In CEDA’s 2018 report on inequality, Professor Peter Whiteford begs the question: Are young people today going to do as well financially compared to older generations?

To answer this, he first turns attention to the changing nature of youth in employment and study, whereby 35.5% held post-school qualifications in 1984 but this figure shot up to 61% in 2016. On the other end of the spectrum, the number of youth jumping into the labour force declined; whilst those in full-time employment fell, from 60% in 1978 to 30.9% in 2017, part-time employment experienced substantial gains, especially amongst women.

It’s no doubt that life choices have shifted, and more people are deciding to further their studies. And some have also experienced the pressure of sacrificing an income if they are to get ahead in their chosen career paths, giving rise to industry compliance bodies needing to enforce the line between what is lawful, and unlawful, in the often hopeful haze that keeps unpaid internships afloat.

Interns Australia, an advocate for fair work placement, says that whilst interning experience is now necessary for career progression, 87% of internships are un-paid and 60% are considered illegal.

Extended education, changing work trends, and roadblocks to steady incomes are only part of the greater mechanics that has shaped the economy. And although current reverberations are not just limited to millennials, it’s hard to catch a break or feel confident on unlevel ground.

However, when Professor Whiteford in CEDA’s report on inequality compared Australia’s income figures against seven other countries, Australia’s youth (25 to 29 years) portrayed a different story – from the years of 1985 to 2010, they experienced income growth at 27% higher than the national average.

Such results vary when it comes to wealth of a more rapid growth, as experienced by older generations than younger generations nationwide.

In CEDA’s report, Professor Whiteford highlights that those born in the 1970s “would have benefited from the enormous increase in Australian household incomes experienced between 2003 and 2008 as a result of the mining boom”.

Whilst he nods to the positive effects this would have also had on those born between the years of 1981 and 1990, he says: “Income trends after 2008 are much less favourable”.

As real house prices continued to rise, however, housing affordability has been worsening, reveals Professor Rachel Ong in CEDA’s 2017 report on housing.

“Those who were not fortunate enough to have purchased their first home by the mid-1990s have found it increasingly challenging to break into the home ownership market,” Professor Ong says.

“The ‘great Australian dream’ of becoming home owners has receded rapidly for younger generations, now widely dubbed ‘generation rent’.”

The cruciality of timing in the property market has never dulled its shine, nor does it encourage those who are now frozen at a crossroads, uncertain on whether to take the mortgage path that could lead them through the next 25 to 30 years.

With houses perched on mortgage stilts, pressure brews for those who are finding it difficult to not only secure a full-time job post-graduation, but one that hands them a suitable income to be able to afford a home loan; a pay check that also recognises and values their training and skillsets.

“I’ve had this experience in some of our CEDA forums where people express concern that this generational divide is not a helpful construct for debates. In their view young people don’t have it any harder today than they [themselves] did, and if anything, taking into account broader indicators of standards of living, it’s better,” Ball says.

“But one of the pressures that I do think is quite unique, in terms of the labour market, is that jobs growth has been strong but the question for a lot of young people entering the labour market today is: Are there the right jobs? And they the ones that are the most rewarding given their qualifications?”

The decision for a young person to take out a significant amount of debt will be influenced by whether they believe their income is going to continue to increase, especially if their repayments represent a significant proportion of their wages, Ball explains.

“If you look at the graduate outcomes survey it appears as though it’s taking longer for people to get a foot hold in the labour market,” he says.

Affordability cuts deeper, as brought to the fore in an exclusive report prepared by PwC Australia titled ‘The Deposit Gap Dilemma – The Impact on Key Workers’.

Using an exclusive CoreData survey, the report uncovered that 79% of some of the most essential workers in Sydney and Melbourne regard home ownership as unachievable. And as a result, 1 in 4 are either thinking of relocating or switching their careers, causing the two cities to experience a shortage in nurses, ambulance officers, teachers and firefighters.

What are the benefits and traps of staying at home for longer?
Pointing towards university debts, rising house prices and work opportunities still being predominately concentrated in major cities, Ball says it’s those unique pressures that can lead to more youth deciding to stay at home.

“It’s a rational way to save more and be able to buy,” he says.

“The rental market is really challenging for a lot of people, both in terms of the quality of the housing stock and the competition that you have to get into the rental market. And the level of rents is quite high, particularly in those areas close to jobs.”

The chief economist also sheds light on how staying at home for longer can work as an incentive; allowing millennials to save money not just as a buffer for rent, but for when they aim to buy.

In CEDA’s 2017 report on housing, Professor Ong puts forward: “For younger generations, increasing earnings inequality and increasing job insecurity have meant that many lower income households are unable to afford home purchase or are unwilling to commit to it. This inequity is compounded when some, but not all, can rely on the ‘bank of mum and dad’ to assist them into home purchase.”

Staying at home can also give rise to drawbacks, especially when entering the market starts to feel largely unachievable, giving way to feelings of helplessness; the thought of whether it’s worth pursuing.

“If you do have a reasonably paying job and you’re living at home, then you might decide that your current lifestyle is more important than saving for the future,” Ball says.

“This can happen when people can become discouraged about their chances of getting into the property market, although the recent decline in prices represents an opportunity for first-home buyers.”

Staying at home, or renting for longer, has also thrust other buying avenues into the vernacular – and it all comes down to long-term strategy and patience.

How can millennials best start working towards their first property?
“The other challenge is the fact that younger groups will always have less assets and be less settled in terms of their finances at that age, and become more confident over time,” Ball says.

“Obviously older age groups have built up wealth in superannuation and everything else, whereas younger groups have actually built up greater debts obviously around mortgages and so forth.”

Whilst this may be the current financial climate younger generations move in, the first sure-fire move to stability is building in savings, no matter how big or small the allocated amount is each pay check.

According to Marcus Roberts, director of Brighter Finance, “as painful as it sounds”, starting to maintain a budget to determine spending habits is a good shift in the right direction.

“There are plenty of mobile apps now that assist and work alongside your online banking,” Roberts says.

“Banks will often ask for your savings statements to ensure that there's a consistency around savings rather than a large deposit made a week prior to a loan application. Try and force yourself to not make withdrawals from that savings account so that month by month there's an upward trend.”

Younger cohorts have beguiled many with their mastery of technology to crowd-source financial advice and loan packages, allowing them to tap into competitive deals. But Roberts warns against what can sometimes get overlooked in the process.

“Examine your way through your bank statements and credit card statements to ensure that there are no monthly direct debits for either apps or programs that you aren't using,” he says.

“Many companies have started 30-day trials followed by paid subscriptions as they know that many people don't check their statements.”

And with computers increasingly monitoring clicked-on interests and consumer weak spots, Marcus relays a tip, especially useful to those who have more disposable income to tap into whilst living at home.

“Twenty-four hour purchase delays can be a method to reduce impulse shopping. If you see something you like, wait on it for twenty-four hours and re-assess. If you still like it enough, then it's likely more than just an impulse item,” he shares.

Roberts also offers alternate income strategies, such as Uber, Airtasker and Upwork, for those in a position where their current income isn’t enough to save a home deposit, but they still aim to purchase as soon as possible.

“It's not the rest of your life,” he says. “And putting either a weekly hours limit or a smaller goal that gets celebrated as you pass the milestone can really help.”

It’s also worth keeping in mind that with the introduction of Lenders Mortgage Insurance, mandatory cash deposits are no longer 20%, but can now be as little as 5% of a property’s value.

But is such an amount enough to secure a first property?

“Rather than going for owner-occupied dream home, in the first instance, what [younger demographics] are doing is purchasing other more affordable properties as an investment to get a good hold on the market, which I think is probably different to our parent’s generation, and others, where the family home would have been the first property in which they invested,” Jarrod Ball, chief economist at CEDA says.

“Obviously that comes down to affordability and also demographic factors around delayed partnering and having children.”

It may not be the dream; to purchase a humble, rugged-up gem out of a major-city area. But it could eventually lead to something greater, and provide an entry door for those looking to start in the market with as little as $10,000.

“Most lenders require a 5% deposit in genuine savings, so should you find something under $200k, you may just make it, albeit limited in size, scope and potential appeal,” says Marcus Roberts, director of Brighter Finance.

“For example, a studio you live in as your own first home may become an investment once you move up and out to a larger property. The rental yields for some studios may be attractive depending on your circumstances, as many professionals like living alone without flatmates.”

However, Roberts explains that the property would likely be a studio or one-bedroom apartment in a metro area of Brisbane, Adelaide or Perth. It also wouldn’t be a straightforward process with finding a lender, as many won’t approve properties that are internally less than 50 square metres.

On the other hand, for those who are fortunate to have a family member enter the home loan as a guarantor, a larger property can be secured from the get-go.

But that’s not to forget that such an opportunity is only on the table for some, so it’s useful to become mindful of a few alternate approaches – one of these being to enter into a property joint venture with someone who shares a common goal.

Pooling resources can make for a bolder first entrance into the market, and whilst Roberts says he has seen the succession of a number of property joint ventures, there are also certain risks that should be considered, such as the potential for a shared loss to occur.

Roberts encourages interested participants to reflect on the wider picture, and ask themselves: “If one party wants to sell and the other one doesn't, how will it work?”

“If you do go down this path, think about engaging a solicitor to help structure an agreement between the owners,” he advises.

A stepping stone can also come about from engaging with one of the first disruptors to Australia’s residential property investment market – otherwise known as fractional property investing – wherein an interested buyer is able to purchase a fraction or ‘brick’ of a greater property, starting with as little as $50.

“BrickX and Domacom are the two most well-known platforms, and whilst you might not be buying your own house, it can be a start for a very small outlay,” Roberts says.

“You should seek professional advice as to whether this meets your goals, circumstances and objectives, but it is an option for those starting from their first dollar of savings.”

The member of PIPA also encourages younger generations to research the Government support grants and schemes that are available within each state and territory.

What help is available to millennials and first-time home buyers?
From concession rates on stamp duty, to saving for a home loan deposit within a superannuation account, there are a few benefits available to younger generations and first-time home buyers, and all of these can be accessed through each state and territory Government’s online portal.

Furthermore, it’s a good idea to become familiar with the lenders that look more favourably upon low-income earners, allowing for lending to be opened-up to a wider range of demographics.

Keystart, for example, is a government-owned agency that has been known to accept borrowers with less than a 5% cash deposit and waiver Lenders Mortgage Insurance.

The market’s currently felt blows might only inspire more bouts of support, as recently seen in Western Australia. In a bid to loosen the shackles around lending and hold-up WA’s housing market, the State Government recently announced that Keystart’s eligibility requirements will be temporarily softened, thereby encouraging more first-time buyers to secure a home loan.

Furthermore, with the Coalition having pulled through the 2019 Federal election, the latest on every home buyer’s mind is the first-home loan deposit scheme; a policy that is expected to see first-time home owners only needing to hold a 5% saved cash deposit in one hand, whilst farewelling Lenders Mortgage Insurance with the other.

As long as you are a single with total earnings of up to $125,000, or a couple with total earnings of up to $200,000, the Government may guarantee the remainder 15% of the deposit.

Recent youth surveys have raised the feelings of uncertainty shared amongst a handful of millennials, yet there are steps that can gradually be taken and a few doors open along the way.

Slow and steady doesn’t always win, but who said any of this was a race?

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