You’ve probably read all the articles. All millennials need to do to get into their first home is give up their luxurious lifestyle of avocado on toast, overseas trips and flat whites, say baby boomers.

But millennials argue that with house prices at their highest in history, it’ll take a financial miracle (like the Bank of Mum and Dad) to get them on the property ladder – if they can even step on it at all.

Brad Olsen, senior economist at Infometrics, says there’s no doubt millennials have it tougher when it comes to getting on the property ladder, because they now often need a 20 per cent deposit to buy their first home.

“And house prices have risen at such a fast pace over recent years, particularly in relation to income.

“It takes millennials longer to get on the housing ladder, then takes them longer to pay the house off over their lifespan.

“I would expect them to be in a worse financial position than previous generations,” Olsen says.

Data and comparisons vary, but economist Benje Patterson says in 1985, the average New Zealand house price was NZ$65,000. This was just over three times the average individual income of NZ$19,000.

Fast-forward to 2019, and the average house price was NZ$600,000 – about 11 times the average individual income, he says.

“We’re really at the limits of how stretched house prices can get relative to income. There’s only so far that elastic band can stretch,” Patterson says.

And Olsen says, “We can see that house prices have increased 248 per cent since 1999. Incomes have only gone up
113 per cent.”

But what about interest rates?

Some argue that in the 1980s, when many baby boomers were buying homes, mortgage interest rates were hovering around a shocking 20 per cent. Now they’re around 4 to 5 per cent.

“But baby boomers were given an easier path if they managed to get hold of a house,” Patterson says.

Those who managed to get the deposit, get the mortgage, and then get the house “did have it more or less set”, he says.

“It was difficult with those interest rates, but they came down, and then they ultimately got a freehold asset pretty early on in their adult life.”

Then the value of their property probably increased significantly, leaving them with large amounts of equity.

What if the mortgage rates go up?

Patterson says millennial homeowners today are a “very risky proposition”.

“We have these massive, massive mortgages, relative to our income, and we’re paying record-low interest rates, which is keeping them relatively affordable.

“But if interest rates were to go up to historical averages, back up to 8 per cent ... that’s why you really need two incomes,” Patterson says.

He says that’s also why banks are looking more closely at household incomes, and making sure buyers can afford their mortgages even if interest rates go up, known as “stress-testing”.

“Because these mortgages are so huge, many households are going to need longer to pay off the principal – they might need all those 30 years.”

The cost of education

Many millennials are also grappling with the huge financial cost of student debt.

Up until the early 1990s, tertiary education was largely free in New Zealand.

The government’s student loan scheme started in 1992, paving the way for generations of Kiwis to be loaded up with large student debt.

It’s not uncommon for Kiwis to have student loans of around NZ$30,000 or NZ$40,000 – sometimes much higher.

Repaying a student loan can have a huge impact on a borrower’s financial situation for close to 10 years or more, resulting in many young professionals not being able to afford houses until this debt is cleared.

Plus, if they head overseas to earn better money, they’ll start paying interest.

The lifestyle aspect

The phrase ‘the avocado on toast generation’ can ring true for some millennials.

Eating out used to be reserved for special occasions for baby boomers, but millennials are heading out far more often for breakfast, lunch, dinner, or just coffee.

Air travel has also come down in price since baby boomers were young. More competition and online booking platforms have made travel cheaper.

Many millennials are partnering later in life, and starting families later. So, that gives them more time to enjoy their money, Patterson says.

“Millennials are able to enjoy quite good lives at present – they do have a lot of fun.

“In some cases, they’re pre-loading their leisure at this end of their life. A lot of baby boomers do it at the other end – they had kids first.”

Millennials and wealth

So, without being able to rely on property to fund their retirement, how will younger generations grow their wealth?

Experts agree that contributing regularly to KiwiSaver is an essential tool for young (and not-so-young) Kiwis.

“Over time, as you quietly grow that nest-egg, it’s going to build up to quite a sizeable share of money,” Olsen says.

Patterson agrees: “You’ll have that snowball effect, from the eighth wonder of the world – compound interest. Or compounding returns, in this case.”

Diversify instead

Olsen says rather than investing solely in their own homes, millennials are increasingly trying to invest in a diversified set of assets.

This might include long-term share investing, which is now more accessible due to new online platforms – and traditional property investing.

“Some of [their money] might be in housing, and perhaps instead of buying a first home, they might buy an investment property first to build up some equity.

“I think millennials are increasingly worried about how to make money, when increasingly property is harder to get into.”

Patterson says: “It’s a much trickier path for millennials to gain wealth through property. But property is a bit of an unproductive asset for New Zealanders as a whole to be investing in.

“A more well-rounded path to success in New Zealand would be putting money to productive use – like investing in businesses that are trying to make money globally, rather than trading houses.”