Should millennials rent, or should they own?
To rent or not to rent is not the question. At least, it is not the complete question.
When housing prices escalated in the recent past, some experts recommended prolonged renting to those who couldn’t afford to own. Some even wondered if Canada would transform into a nation of renters while others dreamed of a “Wealthy Renter.”
Despite the recent romanticising of renting and the hypothetical assertions that millennials have shunned homeownership, renting is unlikely to become a national aspiration. The desire to own a home is likely to continue driving growth in housing markets.
The rapid increase in housing prices in large urban areas has created additional barriers to homeownership for low-income renters. This is increasingly true for millennials whose incomes are not sufficiently large to accumulate a down payment.
For millennials, though, housing tenure is not necessarily confined to a binary of being a renter or a homeowner. It is more nuanced. Millennials are fortunate to have a third fall back option of continuing to lodge with their parents.
In fact, young adults staying longer with their parents represent a large demographic shift in attitudes and living arrangements in North America. Pew Research Center in the U.S. reported that in 2014, for the first time in 130 years, 32.1 per cent of those aged between 18 to 34 years “were slightly more likely to be living in their parents’ home than they were to be living with a spouse or partner in their own household.”
Compared to slightly older cohorts, millennials are increasingly comfortable staying longer with the parents. Census data crunched by Pew revealed that no fewer than 15 per cent of the 25- to 35-year-old millennials were housed in their parents’ homes. In comparison, a mere 10 per cent of Generation Xers in 2000 stayed with their parents. A mere eight per cent of the same age cohort in the sixties lived with parents.
The situation in Canada is not much different. The 2016 Canadian Census revealed similar trends of young adults living with parents. Almost 35 per cent of the young Canadian adults, aged between 20 and 34 years, lived with their parents in 2016. This number was up from 31 per cent in 2001.
Many believe that shifts in the labour market with the gig economy delivering more part-time jobs than full-time ones are the reason behind millennials not being able to earn living wages and starting their own households. The U.S. labour force data, however, suggests otherwise. Pew reports that in 2016 only 5.1 per cent of young adults were unemployed, which was half of the rate in 2010.
Staying with the parents allows millennials to save on rent and expediently save for a down paymentprolonged stay at the parents’ home by millennials has a profound impact on housing markets. It affects the rate of new household formation (the headship rate), which is a key driver of housing demand.
Concomitantly, the same trend prevents parents from listing their larger homes for sale and downsize. One can’t be an empty nester if millennials refuse to spread their wings and fly on their own.
Staying with the parents allows millennials to save on rent and expediently save for a down payment.
While millennials might feel the urge to leapfrog from parents’ home to homeownership, they might want to consider renting from a career perspective.
Renters, unlike owners, are relatively more mobile since they can readily relocate to take advantage of better career opportunities elsewhere. The large transaction costs (transfer taxes, brokerage fees, legal costs, etc.) faced by young homeowners at times deter them from exploring career opportunities elsewhere.
However, renting for too long is also not advisable. In parts of urban Canada where population pressures are expected to increase, housing prices are likely to rise in the long run. This helps homeowners build equity that they can draw upon in old age or transfer housing wealth to their children.
The good news for millennials is that they will have more housing choices in the future than the previous cohorts because millennials are a much smaller cohort than the ones preceding them. This implies that the supply of existing homes is likely to be larger than the housing demand millennials will generate in the future.
Until then they may continue to lodge at the Parents Inn.