Inequality has been a pressing and growing concern for a number of years now.  While most measures of inequality focus on income, however, recent research from the University of Michigan reminds us that wealth inequality is arguably a more effective measure as it takes into account things such as property ownership.

Access to the property market remains out of reach for many young people, as even as prices fell marginally after the Great Recession, they remained far higher than the available incomes of the time.  This has been exacerbated by an asset price boom that has been fueled by extremely low interest rates since that time.

Strong demand

Indeed, the robustness of the housing market is a clear differentiator between the Great Recession of 2008 and the Covid-19 recession.  We’ve seen housing prices surge over the past 18 months across the world, with government stimulus measures stoking asset prices across the board.  Indeed, house prices are up around 13% in the US and nearly 6% in Europe, with similar surges seen in Australasia and South Korea.

In the recovery from the Great Recession, while demand gradually recovered, this was certainly not the case among millennials, whose dreams of buying a home scarcely recovered at all.  That’s the conclusion of a recent paper from INSEAD, which argues that the various packages introduced to stimulate demand again often passed millennials by.

The plunge was particularly great in metropolitan areas, with homeownership in places like San Francisco and Miami falling by around 25% among 25-44-year-olds.  The researchers set out to explore why that was, given that mortgage availability was uniform across the country.

Regional and local trends

To find out, a model was created to map both regional housing markets and local and aggregate shocks in areas such as income, availability of mortgages, construction costs, and the price elasticity of housing supply.

The model revealed that the price differences between places around the country helped to amplify the tightening of credit requirements that was happening nationwide.  In other words, people in more expensive areas needed to borrow more relative to their income compared to people in cheaper areas, which made them more sensitive to any changes to borrowing requirements as incomes weren’t keeping pace with the price of houses.

Postpone buying

This has forced many millennials living in these more expensive regions to postpone buying due to the credit restrictions.  This coupled with the amenities in these areas and the costs associated with moving meant they were also unlikely to move to more affordable areas.

The model was supported by the documented decline in homeownership among young people, especially in more expensive areas.  Data suggests that first-time mortgages in these areas fell by around 55% versus just 25% in less expensive areas.  These low figures remained in place throughout the 2010s.  The average delay on homeownership was six years.

What’s more, this slump happened despite federal support for people to buy their first home.  The center point of this support was the First-Time Homebuyer Credit, which provided a tax incentive of approximately $8,000 to new buyers between 2008 and 2010.  It had been thought to have boosted sales by up to 11%, with a corresponding boost in house prices across the country.

While this is generally positive, the INSEAD study shows that this was not felt equally across the country, with the scheme only managing to cushion 1/7th of the decline in homeownership in expensive areas but around 1/2th of the decline in less expensive areas.  In other words, the scheme mainly encouraged people to buy homes in less expensive areas.

To ensure a more even spread around the country, it would perhaps have been better to have made the subsidy proportional to local house prices.  Alternatively, the model suggests that policies such as scrapping student debt would also have helped.

Of course, for all the difficulties in getting onto the housing ladder, the period also saw a boom for landlords, with rental prices growing by 8.3% in the most expensive cities.  The model highlights the difficulties faced by younger people, and provides a reminder of the need for more nuanced support for those young people trying to make their way in the wake of the Covid recession.