BTR

Homeownership Gets Boost From Ageing Millennials

Homeownership in the U.S. continued its ascent in Q3 2019 boosted by increased buying from an ageing millennial population.

The homeownership rate reached 64.8% not seasonally adjusted and 64.7% seasonally adjusted. Both rates rose 0.4 percentage point from Q2 and year-over-year.

The homeownership rate has been gradually rising for three years following a decade-long decline. Q3 marked the largest quarterly increase since Q3 2016.

Tailwinds for homeownership include low mortgage rates, low unemployment and millennials moving more firmly into lifestages where homeownership is traditional.

Yet, the financial challenges of buying a house and the mismatch between consumer demand and available housing product present headwinds.

I believe the homeownership trend will continue the slow upward course it has been on for three years. Rates will level off far below the 2004 peak of nearly 70%.

Youngest Cohorts Have Largest Gains From Trough

Homeownership for the 35-to-44-aged households—half Gen Xers, half millennials—had the largest year-over-year increase in Q3 (0.8 point). The under-35 cohort—nearly all millennials—experienced the next largest increase (0.7 point).

The 45-to-54 age group—all Gen Xers—had the third largest year-over-year gain (0.4 point). Homeownership fell for the 55-to-64 year old households—all baby boomers.

Historically, from the 2004 peaks to the 2016 troughs in homeownership rates, the largest declines occurred with the younger cohorts. Homeownership in households aged 35 to 45 years old fell 12.1 percentage points and the under-35-year-old households fell 9.5 percentage points.

Since the troughs, however, these two cohorts have also experienced the largest increases in homeownership rates. Homeownership of the youngest households rose 3.4 percentage points since the trough, compared to the gain of 1.9 points for all ages. Households aged 35 to 45 years old experienced a 2.3 percentage point gain.

Homeownership rates for the 65+ year olds and for the 55 to 64 year olds have experienced minimal movement since the trough three years ago (1.0 point and 0.4 point, respectively).

South & West Have Largest Rise

Regionally, the Midwest maintained the highest homeownership rate in Q3 (69.0%). Homeownership in the South and West regions rose 0.8 and 0.4 percentage points from a year ago.

By metro, Los Angeles had the lowest homeownership rates in Q3 (48.2%), followed by New York, Orlando, San Jose and San Francisco. Metros with lower rates typically have either high housing costs or high levels of in-migration.

Lifestyle & Housing Costs Influence Trends

During the 2008 recession and in the early years of recovery, the stressed economy and uncertain individual household finances contributed greatly to reducing homeownership rates. Yet homeownership rates continued to fall even as the economy and households began to get back on their feet.

In recent years, many non-economic lifestyle factors have influenced homeownership trends, including marrying later than previous generations, starting families later and placing a higher value on housing flexibility (renting allows for more mobility). The greater social acceptance of renting than in previous generations and the increased popularity of urban living (where renting is more common than owning) have also kept homeownership gains subdued.

Surveys have shown, however, that most renters want to own a home at some point. Therefore, the rising cost of housing is the major deterrent to homeownership. U.S. home prices have risen by about 6% annually since the recession with significantly higher increases in many markets. (Note, however, that this year, mortgage rates have been coming in quite low, thereby mitigating the cost of homebuying. As of October 24th, 30-year fixed-rate mortgages averaged 3.75% according to Freddie Mac.)

The biggest trend which should be driving homeownership rates higher is demographics: aging millennials. Homebuying increases with age, and millennials are moving into homeownership, albeit at a slower place than previous generations.

BJeanette Rice, Americas Head of Multifamily Research, CBRE.

The Evolution of BTR

Over the past couple of years, financial investment in the UK’s build-to-rent (BTR) sector has finally translated into the first generation of bespoke, professionally managed rental accommodation.

The total capital committed to the sector in 2017 broke the £2bn barrier for the first time and there are now more than 19,000 completed BTR units across the UK. But while the industry may rejoice that efforts are now coming to fruition, we can sometimes forget that, unlike us, tenants haven’t spent years talking about this new and exciting asset class. It is only now that they are experiencing BTR and we are getting feedback as to whether it is what the tenant wants.

The evidence in the market thus far points to a resounding ‘yes’. According to property data analyst Molior London, average absorption rates at BTR schemes in London have been well above the wider market. Our experience with operators who are active in key regional cities mirrors this. This is partly due to the lack of choice in the underlying market, and often the poor quality of existing stock – 40% of private rental property in the UK does not currently meet the government’s decent homes standards. In addition, 73% of stock is owned by buy-to-let landlords, who are not professional landlords and collectively have not helped the reputation of the sector. As such, there is considerable pent-up demand for high-quality accommodation and a professional management offering.

The sector is still in its infancy and as a result, there has been a focus on the prime end of the market. This has partly been driven by economics – to compete with the for-sale market and competitive land pricing, developers have focused on higher-value opportunities.

However, the provision of prime rental accommodation also reflects the sizeable demand for this product. Renters are not all just ‘the generation who can’t buy’. In London and around the UK, many renters are professionals who earn a decent salary and want to live in high-quality accommodation in vibrant areas that are close to work and amenities. There is a legitimate market for these tenants who are often willing to pay for additional lifestyle perks and convenience.

Clearly this doesn’t account for all 5.3 million renter households across the UK and indeed, a one-size-fits-all should never be the answer. But as BTR evolves, we will start to see much greater diversity, from product to price, as we seek to cater for more segments of the market. For example, over a third of (private) renter households are families, so identifying how best to cater for this market unlocks huge opportunity. In addition, we are learning about product features that are popular in the prime BTR market that can be replicated at a lower price point, such as the use of technology in communicating with landlords, a well-thought-out facility for deliveries and a strategy for move-ins. Ultimately, it is clear that investors and developers want to unlock the bigger opportunity, not just the prime opportunity.

With more than £30bn of global capital looking to invest in this sector across the UK, and developers often keen to de-risk larger schemes by introducing a BTR element, there is also a real opportunity for BTR to help address the housing shortage. It already has momentum: there are currently more than 27,500 BTR units under construction and a further 58,500 with planning consent.

So, while rooftop tennis courts and swimming pools might dominate the limelight – as they do in the for-sale market – the wider BTR sector is working hard to deliver much-needed accommodation for tenants who are looking for an affordable, quality property with a decent landlord.

By Helen Gray, Director, UK Development, CBRE.