story

Are older households turning into the landlords of the youth?

by Pedro Gete & Athena Tsouderou
Posted on June 24, 2020

Homeownership rates have been dropping significantly all over the world. After decades of steady rising, fewer and fewer households own their home, especially towards the end of the 2000s (Figure 1). In our research, we use data from Spain, which was harshly hit by the global financial crisis of 2008. We found several striking results with important implications for the banking industry, policymakers and households.

pedro-gete-figure-1.png#asset:14691

Figure 1. Homeownership rate around the globe. Source: U.S. Census Bureau, U.K. Ministry of Housing, Communities & Local Government, Eurostat, and Hong Kong Census and Statistics Department.

1. The young: renting instead of buying

Young households - below 30 years of age - account for most of the collapse in homeownership rates. The share of young Spanish people owning their home decreased dramatically in the last few decades: in 2002, 60% of young households owned their home, versus only 36% in 2014 (Figure 2). Lower demand from young households for ownership means higher demand for rental housing. Housing rents have indeed risen quickly in most cities.

One factor explaining this change in young households’ behaviour is the difficulty in obtaining mortgage loans.1 Stricter requirements by banks to approve mortgage credit after the crisis lead many young households to turn to rentals. However, it is not clear that renting is the best option. Owning a house is a way to force savings and accumulate wealth. Young households have limited options in terms of purchasing their first home, compared to the older households.

Figure 2. Homeownership rate in Spain by age group for the years 2002 and 2014. Source: Spanish Survey of Household Finances.

Figure 2. Homeownership rate in Spain by age group for the years 2002 and 2014. Source: Spanish Survey of Household Finances.

2. The elderly: buying more, and renting to the young

Our second core finding is that older households – above 50 years old – are absorbing the stock of housing that the young are not buying. In Spain, their homeownership rates are close to 90%. Older households now not only own their main residence, but they also dramatically increased the number of properties they own. Considering the fact that the housing stock in Spain has not changed much since the 2008 crisis, the increase in ownership of properties by older households seems to make up for the decrease in ownership by the young.

Spanish elderly, between 60 and 80 years old, are buying more houses as investment assets: 70% of them owned multiple properties in 2014, versus 40-50% in 2002 (figure 3). They are expanding their role as landlords, renting their houses to the young. Why? Likely because the return from rentals (between 5% to 8% on average) exceeds the return of other assets (such as bonds2) usually considered safe. As we show in Figure 4, households above 60 years old in Spain owned on average 3 properties in 2014, whereas they owned on average 2 properties in 2002.

Figure 3. Share of households in Spain by age group who own additional properties, apart from their main residence, for the years 2002 and 2014.

Figure 3. Share of households in Spain by age group who own additional properties, apart from their main residence, for the years 2002 and 2014.



Figure 4. Average number of properties each household in Spain owns by age, for the years 2002 and 2014.

Figure 4. Average number of properties each household in Spain owns by age, for the years 2002 and 2014.


The value of loans that banks give to households in Spain has dropped significantly in the same period that the homeownership rates dropped3, as we show in Figure 5. Since the mortgage credit has decreased, older households are likely to use their savings to finance the purchase of additional properties. They do not bring about any increase in the demand for mortgages. Moreover, older households are moving their assets from financial products into real estate. Real estate investment seems to be crowding out other savings options, like long-term deposits.

Figure 5. Bank lending to households in Spain, year-on-year growth. Source: Banco de España.

Figure 5. Bank lending to households in Spain, year-on-year growth. Source: Banco de España.

Implications

Our results show that young households have changed their behaviour. This has implications for housing prices and rents. As demand moves from ownership to rental, the ratio of rents-to-housing prices goes up. Households may end up paying too much for renting, relative to what they would pay if they attempted to own a house.

Our results also paint a picture that may challenge the traditional banking industry, as they reveal new risks for the financial stability of lenders.

(1) Banks may face more difficulty to generate lending revenue. Traditionally the main borrowers from banks have been young households buying their (first) homes. Decreased demand means that banks face a decrease in their income from lending.

(2) Banks may face problems to raise deposits or sell financial products to older households. Older households buy more and more real estate. Rental yields from their additional properties replace the income from more traditional investments, such as bonds and deposits. Demand for financial products drops, as well as for deposits.

(3) Households that do borrow from banks, ask for higher loans. As they borrow more (relative to the value of their homes, or to their income), the default risk of their loans increases. Banks might be taking on higher default risk, which does not benefit the financial stability of the banking industry.

These findings also have important policy implications. First, the transmission channels of monetary policy change. Changes in interest rates do not affect the households that are renting, since, for example, they do not have a mortgage to refinance at lower interested rate. Renters are disconnected from the intended effects of policy changes. In an economy where the young households (who usually consume more) are renting, the monetary policy is less effective to stimulate aggregate consumption in particular.

The implications are also far-reaching in terms of fiscal policy. In an economy where only older households are homeowners, fiscal policies related to housing and mortgage credit will effectively only affect older households. Renters, for instance, cannot deduct mortgage payments and are not sensitive to changes in property taxes. In other words, fiscal policy will stimulate the economy differently, compared to pre-financial crisis.

Recent literature has shown that inequalities in housing wealth account for a large share of wealth inequalities. Our new findings suggest that these trends will only accentuate the inequalities over time, since housing is becoming more concentrated.

Pedro Gete is Associate Professor of Finance at IE University

Athena Tsouderou is a Doctoral Candidate at IE University

Footnotes

  1. Gete and Reher (2018) show this mechanism in a paper published in the Review of Financial Studies.
  2. For example, the 10-year Spanish government bond yield dropped from 5% in 2002 to 2.5% in 2014, and is now below 1%.
  3. Homeownership rates in Spain dropped from 81% in 2007 to 77% in 2017, according to Eurostat.