Does “Generation Rent” mean the end of banks?
The TechCrunch article was headlined “Millennials Are Destroying Banks, And It’s The Banks’ Fault” and the first sentence was “Millennials are rejecting home ownership across the land.” The article went on to say how millennials want to see banks “completely destroyed.”
Based on some research I’ve done, this is not an accurate statement of generational attitudes: most millennials are dealing with banks now, and expect to deal with them in the future. They are indeed sometimes different in what they want from their financial service institutions, but those differences are more complicated than you might think based on the media stories around the demographic trends.
Let’s take a look at the home ownership part of the argument. Mortgages are a big business in the USA: about $1.2 trillion per year of origination annually as of 2014. If millennials always rent and never buy, that would be a profound change for banks and other lenders.
Have 18-34 year olds really stopped buying homes? No – my oldest daughter’s boyfriend just bought a condo, and he’s not even 25. Our neighbour’s daughter got married last May, and she and Dan (32) just bought a place.
Are Josh and Dan the only ones buying? No – according to the data, nearly four out of ten (38%) 25-34 year olds in the US owned their own homes as of 2012.
OK, but that’s lower than in the past, right? Yes – in 1980, just over half (52%) of 25-34 year olds were homeowners. That demographic has therefore seen ownership decline by over a quarter in 30 years.
Aha! So this is a terrible thing for banks? Probably not. Home ownership rates vary over time, and for a whole bunch of reasons. Interest rates, affordability, youth employment and wage rates, government policies, consumer or student loan debt levels, and overall economic conditions all play a role. Take a look at the chart below: the home ownership rate for Americans under 35 (the bottom line in purple) has always been low. It was over 40% in 1982, fell to the mid-30s level by 1994, rose to the mid-40s before peaking in 2004, then was already trending downward even before the 2008/2009 mortgage crisis and recession.
Still, that decline since 2004 could reflect new anti-ownership attitudes from millennials? Maybe. One of the big problems with making broad statements about different generations is there are some effects that are persistent over time (called cohort effects), and others that are transitory (age effects and period effects.) For example, today’s millennials are unlikely to start subscribing to print newspapers or buying CDs when they turn 35. It is unclear if the current relatively lower level of home ownership is the beginning of a trend, or just a reflection of some large and disruptive event that has delayed ownership, but not permanently.
Ummm…like the worst recession in 70 years, which saw millions lose their life savings due to home ownership? That’s a reasonable assumption! 🙂 You can see from the chart below that home ownership in the US (this is for ALL age categories, not just 25-34 year olds) rose at the beginning of the 20th century to 1930, then dropped following the Great Depression. That was a real drop, and significantly affected the US banking system. But by 1950 home ownership was rising faster than ever before, and was well above the previous peak. It is possible that the current decline in home ownership is the start of a long term trend, but it is also possible that once the memories of 2008/2009 fade, ownership and mortgages will rise again. The only way to tell the difference between cohort effects and period effects is to wait a decade or two.
But we still know that millennials hate banks? I don’t think so. If you look at the image below, you can see that the reasons that millennials haven’t bought yet varies by region. They may not have the down payment, they have too much student loan or credit card debt, or they don’t know where to start/worried about their credit score. None of those seem to indicate that the banks themselves are the problem: in fact, the survey suggested that more than half of millennials are planning on buying in the next two years.
“Generation rent” can more accurately be called “generation rent…for now.”
In my next column, I want to take a look at how millennials are likely to do business with banks? Are they going to be digital only, fully self-serve, and do everything over the internet? Can banks need to get rid of human mortgage lenders?