Generation Rent: Why No One is Buying Houses Anymore7 min readReading Time: 5 minutes
Earlier this week, we had the pleasure to sit down with RoomMate S.A. CEO & Co-Founder, Mattia Raffaelli, and ask him a few of our burning questions about the topic of “Generation Rent.” This trend of renting over buying has changed the entire housing market over the last decade, so we wanted to hear an expert’s thoughts on the topic.
The term “Generation Rent” has been defined as “a generation of young adults who, because of high house prices, live in rented accommodation and are regarded as having little chance of becoming homeowners.”
Q. What do you believe is the most important factor influencing this generation to rent?
A. I think that the most important factor is unfortunately a factor that generation rent cannot influence, which is access to disposable income. In the past 10-20 years, there has not been steady economic growth. GDP has not been growing, it has been stagnant or going down.
Inflation and uncertainty are rising. An idea that encompasses the state of the world currently is this theory called VUCA World.
VUCA is an acronym for volatility, uncertainty, complexity, and ambiguity. This is a concept that sums up the present time. In relation to this idea of VUCA World, I as a young person am not willing to commit to a 30-year mortgage because I am not certain where I will be working, living, or what I will be doing in the near future, so there is always an element of uncertainty and ambiguity in this generation.
Q. Do you believe it’s worth investing in real estate today, even with this trend in renting over buying?
A. My short answer is yes, but my longer answer is yes because it is important to differentiate assets. Where I see the best yield and best return is in residential rentals. These are the rentals, for example, that can be split up into university housing and multifamily housing. Would I invest in commercial real estate right now? Probably not. Would I invest in office space? Not with hybrid and remote work becoming more of the norm.
Now, it is residential real estate that will give you a yield that you wouldn’t get if you bought stock. In terms of returns for investors, investing in residential real estate is a very appealing opportunity considering also the factor of resiliency. In comparison to the VUCA ideology, these “resilient” assets are predictable and there is less volatility in terms of the kinds of returns. Hence, it is better for people in terms of investment planning.
Q. How do you see this “Generation Rent” different from the people renting 15-20 years ago?
A. So, here we need to make a distinction between offer and demand. Offer is the housing stock, the supply side of the market. Speaking of supply, the supply is considered “inelastic”, which means that the supply of houses cannot increase overnight. So, with respect to 15-20 years ago, yes the supply has increased, but not even as a fraction compared to the increase we have seen in demand.
The difference I see is not in the supply, although now the market is moving, investments are coming, buildings are being built, and also there is the mobility factor where they are now building new buildings outside of the city while still being connected, which was something that was not present 15-20 years ago. The difference is that the dramatic rise in demand was unprecedented. On average, the provisional rate (a metric that states the number of beds available on a hundred-point basis for students) in Europe is 10-15%, which means there are 10 beds for 100 students. As you can see from this example, the demand has skyrocketed.
There are studies that show a positive correlation between economic crisis and investments by families in education. What that means is that tenants would rather use the little money they have during an economic crisis to pay for their children or themselves to be better educated, so rather than spend that money on housing towards paying a mortgage, they would prefer to rent instead.
Q. What does a person in this “Generation Rent” look like?
A. From what I see, a person in Generation Rent is 18-35 or 18-40. There is no distinction between males and females, and these are usually people who are either studying or working and usually not in the place where they were born. The reason for this is that if they were young and living in the place where they were born, they are likely to live with their parents or they might buy a house close to family.
These people have placed large importance on environmental sustainability and ESG, or European Sustainability Goals, and it is important to them that the buildings that they are living in are sustainable. They also on average speak their naive language as well as English. They are willing to travel, they are willing to have new experiences, and they move away from home to live or study somewhere else to have new life experiences.
These people, let’s not forget, grew up during the economic crisis in 2008. In contrast to the previous generation growing up during the economic boom in the 1960s-70s, this generation experienced the exact opposite. Because of this, people in this generation have instilled the idea to save rather than invest money in long-term assets such as homes because of the unpredictability of the economy. As a result, instead of looking to settle down, people in this generation prioritize having experiences that bring them positive emotions and feelings, which is completely opposite of the old tenant persona where they were just looking for a bed and a place to live.
Q. Would you encourage someone today to rent a property rather than to buy one?
A. Well I don’t know if I would encourage everyone to rent, because every situation is different. It is not black and white. In some cases, it is better to buy and in some situations it is better to rent. For sure, if we speak of the tenant persona, now renting for them might make sense because they cannot afford to buy a house. If they commit to a mortgage, they have to commit to themselves the same way of life for 30 years, which even if they want to, the externalities of the market are not allowing them to do so. Say unfortunately they lose their job, or they are having a better job offer in another city, so it is difficult for them to commit.
In this case, renting is great because it can give more flexibility to switch and change in an environment that is more volatile. This is also what we are trying to do and raise awareness about here at RoomMate. Overall, everywhere in every sector, there has been a transition from fixed costs to viable costs. Fixed cost: I bought a house and now I have an asset. Viable cost: I don’t buy, so I don’t own the asset, but I have the ability to switch on and off this cost. We have seen the same thing when people lease a car instead of buying it. We have also seen it with services like Uber and Furniture as a Service companies.
In order for this generation to edge over things that they cannot control, such as the war in Ukraine and inflation, the best thing they can do is stay flexible so they can move and won’t be stuck if something happens. As a young person, it might not be the best idea for them to buy a house, unless they have the money to do so. And if they do have the money to buy a house, instead of buying a house for themselves, they could buy it as an asset and rent it to others so they can make a passive income.