Thursday, August 03, 2023
Death and Money
After early retirement, I bought my first house, with the money I had recently inherited from my parents. That statement is true, albeit somewhat misleading; I could have afforded a house much earlier, and I could have bought a house with my own savings. I used the inherited money because it was on hand, not tied up in some other investment. For a moment I thought that buying your first house so late in life, with inherited money, was somewhat unusual. Then I realized that this might well become a trend.
In many first world countries two things have happened over the past decades: House prices have risen a lot faster than general inflation, and wages have risen slower than general inflation. I won't be going into all the reasons for that, from green belt / zoning laws to globalisation. But the overall effect has been that the price of a single family home as a multiple of that single family annual income has gone up significantly. I just saw a report from the UK, where it was stated that even in the regions with the cheapest houses the house price / annual income is now over the recommended maximum of 5, and in London it can be as high as 14. That is simply unaffordable, even more so with rising mortgage rates.
But there is another side to that coin. Economists have jokes few non-economists understand, and one of them is that we haven't found out how to get a loan from the Martians. Which is to say that every debt, every mortgage of one person is another person's savings. Even if you think you owe that money to your bank, that bank has owners and shareholders, and thus indirectly you own that money to them. Somebody profited from that rise in house prices, and it is the people who own those houses.
Now I have always been opposed to the simplistic and wrong narrative that the boomer generation has somehow conspired to steal all the money from the millennial generation. Parents rarely consciously steal from their children. But the boomer generation, of which I am a part of, had a work life under very different, and more favorable, economic circumstances than the younger generations. And a large majority of those unaffordable single family homes is owned by the family living there. Intergenerational economic inequality has gone up, but that has a natural end. Sooner or later these house owners will die, and the younger generations will inherit that house.
Of course for some families this generational transfer of wealth will happen earlier and voluntarily. A lot of house purchases these days are financed by the "bank of mom and dad". Parents who bought a house when it was still affordable, and have paid off their mortgage, sometimes are willing to take out a mortgage on that now much more expensive house and give the money to their children, so they can put down enough money for their house. Other parents won't be as generous, or would rather hang on to their retirement savings because nobody knows how long they will live. In that case the generational wealth transfer happens at the death of the parents. And from statistical information about life expectancy and typical age of having children it is easy to see that a lot of those inheritances will go from parents in their 80's to children in their late 50's.
Of course there is a lot that is wrong with that picture. It means that for many people having a middle-class education and job becomes less important than having middle-class parents, reducing social mobility. Waiting for your parents to die so that you can afford a house is a terrible thing. And it also means a world in which families with children live in cramped rented apartments, while those single family homes are inhabited mostly by people whose children are out of the house already, and there are a lot of empty rooms.
A sharp drop is house prices would provoke a lot of cries of woe and recession. But in the end, cheaper houses means a better intergenerational wealth distribution. Thus public policy should do a lot more to enable more houses to be built, and to provide more social housing as well, existing house prices be damned.