Millennials account for 36 per cent of the GCC population, of which 60 per cent are between 25 and 34 years old and, therefore, likely to occupy their own homes. Here and across the globe they are an increasingly significant driver of the real estate market.
While it’s difficult to generalise across 15 million people, data do exhibit a different attitude among millennials towards home ownership when compared to previous generations. Typically, millennials defer the purchase of their first property until they are 32, versus an average age of 27 for Generation X.
A multitude of factors sit behind this. Not least is the fact that millennials’ entry into the real estate market coincides with some of the longest and steepest periods of real estate price appreciation in the last century. In London, affordability for first-time purchasers, measured as a multiple of average income, has soared from 8x in 2009 to 14.5x last year.
Rents across major cities have also risen broadly in step with house prices. In Dubai, the mortgage with capital repayments on an apartment in popular areas is often very similar to annual rental. The barrier for most remains the significant deposit required to initiate a purchase.
Also, jobs and cities are increasingly viewed as ephemeral concepts. Whereas a career often meant dedicating one’s working life to one employer in one particular city, millennials are much more likely to trade employers, cities and even countries in search of richer professional and personal experiences.
Hence, millennials increasingly view home ownership as a longer-term ambition than was the case for previous generations. Known colloquially as “generation rent” and given their longer-term stance, millennials prefer to balance their income between lifestyle spending and longer-term saving, rather than focus on the latter at the expense of the former in the short term.
Millennials will, therefore, rent in desirable, more expensive areas, as opposed to saving to buy in less expensive areas and show inertia towards leaving such areas for less desirable yet cheaper areas. Similarly, millennials spend proportionately more on travel. In both instances, the destinations are heavily influenced by word of mouth and social media.
Anecdotally, ownership of a second home also appears to be falling. Millennials have grown up with the on-demand sharing economy and value variety over familiarity. Hence, they embrace the choice and convenience afforded by sites such as Airbnb, as opposed to settling on one location.
Hence, it is life events such as marriages or births, combined with earnings progression, which increasingly precipitate first home purchases — all of which now tend to happen in their thirties. By this time, the millennials’ needs have graduated beyond starter homes and, progressively, first home purchases are becoming larger properties. According to a recent survey in the US, 41 per cent of condominium buyers cited size as their top priority in making a purchase. Furthermore, millennials are seeking 25 per cent more square footage than previous generations.
Millennials are as motivated by home ownership as previous generations (a recent survey suggests that 80 per cent wish to buy). However, they are deferring purchases and, when they do commit, seek larger properties — commensurate with family needs.
What does this mean for developers and the broader housing market? In summary, millennials are as motivated by home ownership as previous generations (a recent survey suggests that 80 per cent wish to buy). However, they are deferring purchases and, when they do commit, seek larger properties — commensurate with family needs.
Hence, developers who wish to court first-time millennial buyers do well to remember the old adage, “location, location, location”. Developers in the UK, who have countered the cost of purchasing in such locations by marketing much smaller, yet impeccably designed, micro-studios in popular locations, have enjoyed enormous commercial success and provide millennials with a first step onto the property ladder at an earlier age. Similarly, regulators who seek to drive financial discipline and literacy through home ownership, while helping first-time buyers onto the ladder, have launched successful schemes to lend first-time buyers part of a deposit.
Matthew Palmer is one of the managing directors of Alvarez & Marsal. The views expressed here are his own.
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