Gadfly

Why Millennials Won't Be Buying Your House

Student loans are a problem for all of us, not just the young.
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A student carries a banner calling for free education while participating in a demonstration in London

Photographer: Getty Images

Having been rejected by young people in the recent U.K. election, a senior minister in Theresa May’s government called at the weekend for a “national debate” on England’s 9,250 pound ($12,000) yearly student tuition fees -- which the opposition Labour Party wants to abolish.

The minister, Damian Green, got his wish. A lively discussion followed about whether it's fair to ask graduates to pay for their own education. And this isn't just a question of fairness or politics, the economic consequences of student loans are hugely important too.

Mounting student debt in the U.K., U.S. and elsewhere, might hold young people back from buying houses and saving for retirement. That would endanger economic growth and asset prices, with the effects made worse by shifting demographics. This should worry everybody.

In England, recent students will have amassed more than 50,000 pounds ($65,000) of debt on graduation, which they have to start repaying once they earn more than 21,000 pounds a year. About three-quarters aren't expected to be able to repay the full amount. In the U.S., where aggregate student debt has surged 170 percent in a decade, recent graduates owe $34,000 on average. About 5 percent owe more than $100,000

True, graduates usually earn more than those without a degree. Yet their wages have been held back by the 2008 recession. Demographics also matter because companies have been struggling to fund generous pension promises to retiring baby boomers, and so haven't raised pay as much. Hence millennials will probably take longer to pay off student debt, making it harder to buy a home or other financial assets.

Federal Reserve Bank of New York

Of course, most financial assets have also become much more expensive over the past couple of decades, and that's partly down to demographics too. As the baby-boom generation saved for retirement, they drove up the price of bonds, shares and houses.

A first-time buyer now needs more than 100,000 pounds for a deposit on a London home. Unsurprisingly, home ownership has tumbled among young people on both sides of the Atlantic. Coupled with high rents, repaying college debt is yet another hindrance to saving for a home deposit. In the U.S., missing a student loan repayment can also harm your chances of getting a mortgage. 

This is all a worry economically because buying houses leads to more consumption -- fixing the place up, buying furniture, etc -- so student debt may be depressing potential growth. Owning property, or other financial assets, is also an important way to build up wealth. But young people are holding more of what little money they have in cash:

It's natural that people still struggling in their 30s to pay off a student loan and accumulate a home deposit might not rush out to buy stocks priced at well over 20 times last year’s corporate earnings. But it means millennials haven't gained as much from recent buoyant equity markets as older generations. Less generous pension plans don't help. The upshot is that a typical adult born in the U.K. between 1981 and 1985 had only half as much wealth at age 30 as someone born five years earlier, according to the Resolution Foundation. 1

Parents who use retirement savings to help their kids go to university or buy a house know this problem touches everyone. Indeed, the negative effects of this generational divide will probably weigh even more on older people as they become a bigger share of the population.

Many baby boomers hope to trade down to a smaller house one day and will have to sell financial assets to fund their retirement. But they'll need buyers: i.e. millennials. If younger people are still burdened by debt and their earnings haven't risen much either, that might be difficult. Or prices may have to fall. An increase in the ratio of retirees to workers in developed countries is expected to put downward pressure on asset prices and financial returns in coming years. 

Given these headwinds, it doesn't seem sensible to load student debt onto the people we want to drive other kinds of consumption and sustain the housing market. 2 Changing things will demand tough political choices. But while the debate is often framed as millennials versus the boomers, this is a dilemma for all the ages.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. NB, in this example student debt isn't thought to have been the primary driver, as 9,000 pound a year tuition fees were introduced later.

  2. Germany doesn't have tuition fees.

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