Why are young people unable to access home ownership?

Guzmán Antonio Muñoz Fernández, Universidad de Córdoba
Adaptation: Àlex Blancafort

Introduction

Traditionally, Spanish families have tended to hold their savings in the form of property assets, often primary or secondary residences. This has led to Spain having one of the highest numbers of home owners of all the advanced-economy countries, and the highest number of homes per family unit. Therefore, the percentage of Spaniards living as owner-occupiers amounts to 76.7% (INE, 2017).

However, since the economic crisis began in 2008, for most young people access to home ownership has become an unsurpassable obstacle. Firstly, high rates of unemployment and of irregular job contracts are causing a lack of purchasing capacity; in other words, young people have major difficulties buying a home due to the difference between the income they receive and the price they must pay. Secondly, there is a problem of lack of repayment capacity if the maximum monthly mortgage repayment and the low and fluctuating incomes of this population segment are taken into account.

This reality has led, in recent years, to a drastic fall in the percentage of young homeowners. Today, the majority find themselves forced to opt for rental when they leave home. However, it is precisely in the rental market where the greatest increases in prices are being seen, which means many young people are forced to delay their date for leaving home, to house-share a rental property, or to resort to help from their parents

This article focuses on analysing the socioeconomic variables that currently define the housing market for young households, both single- and multi-person homes. The analysis confirms that the precarisation of young people’s economic and employment conditions has grown more acute in recent years, coinciding with the economic crisis. This has led to a curbing of access to home ownership by young people in Spain, a trend that is growing.

1. Buying a home: mission impossible for young people

Since the start of the crisis, there has been significant decline in the home-purchasing capacity of young people. Purchasing capacity refers to the relationship between the average house price and the average wage. This indicator depends on the disposable income per family unit and is closely linked to the creation of employment.

In fact, the last decade has been characterised by a high rate of unemployment among young people. For example, the proportion of the population aged between 16 and 29 years that is out of work rose from 12.9% in 2007 to 44% in 2013. Although this percentage, according to the Active Population Survey, has decreased in recent years (in 2018 it stood at 28.1%), it continues to stand at much higher levels than among the rest of the population.

Furthermore, despite the fact that young unemployment has declined since 2013, the temporariness of the jobs being done has increased substantially. For this reason, young employment is now synonymous with temporary work.

Moreover, while in the year 2004 some 11.2% of young people aged between 16 and 29 years had a part-time contract, by the year 2018 this percentage had risen to 27.1%. In many cases, furthermore, this part-time work is involuntary, due to the impossibility that many young people face in finding full-time jobs.

  • Part-time employment among young people, for the most part involuntary, rose from just over 10% in 2004 to nearly 30% in 2018.


Lastly, in addition to the increase in part-time employment, high rotation contributes even further to precarity for young people. Between 2007 and 2017, there was an increase from a chain of 3.4 to one of 5.2 employment contracts per year (CCOO, 2018). In other words, on average, young people need to secure more than five contracts in order to work for a full year.

Since the start of the economic crisis, there has been an accelerated decline in the number of young homeowners: today barely 26% of people aged under 29 are owner-occupiers, versus 54% in 2008.

All of these factors have led, in the most acute period of the 2008-2016 crisis, to a reduction in the average annual income of young households, from 34,300 euros in 2008 to 25,500 euros in 2014, according to Bank of Spain data. This regression means that for many of them having a regular income to be able to consider home purchase is not feasible. They cannot even benefit from the fact that prices have undergone a significant fall since the high point of the property bubble was reached.

2. Difficulties in access to mortgages for homebuying

In addition to the problem of purchasing capacity, young people face a lack of repayment capacity. This refers to the percentage of disposable income represented by mortgage repayments. These repayments need to be made monthly and over the long term, which requires stable and verifiable sources of income in order for financing to be granted. Although the current levels of demand from banks when granting mortgages are lower than during the crisis, they still represent an obstacle for access to the property market for this segment of the population.

To access home ownership, young people typically have to contribute over 60% of their monthly income to making their mortgage repayments.

Moreover, the standards used by the banks themselves recommend not to allocate more than 30%-35% of monthly income to paying the mortgage. With this, the aim is that families will have at least 70%-65% of their monthly wage left for basic needs such as food, clothing, and even saving. However, at present, the percentage of net salary for a single-person household that might be reserved to cover the cost of the first mortgage instalment for a free-market home can exceed 60%.

For this reason, a young person can only buy a home with great difficulty. Based on the annual average salary (11,161 euros), a home can be purchased worth a value of up to 78,289 euros (if the buyer is a single person), or 143,595 euros (if it is a young household with more people), assuming a 30-year mortgage and an interest rate of 2.35%. This means assigning the recommended 30% of the net salary to paying the loan. Obviously, it also depends on where the house is being sought. The average price of a home in Spain is around 175,000 euros, but in cities such as Madrid or Barcelona, the value of property, in the majority of cases, forces people to assign over 60% of their salary (figure 2).

  • With the average annual salary of a young person aged between 16 and 24 years standing at 8,140 euros, the maximum recommended price of a home cannot exceed 57,106 euros. Although by age 29 years this salary has risen by more than 3,500 euros, the maximum price can still not exceed 83,457 euros, an amount that is clearly insufficient if one considers that the average price of a home in Spain is around 175,000 euros.


Regarding the low or near-negligible capacity to pay for housing, for the majority of young people the biggest problem is the initial layout for the property and the guarantees that need to be provided for mortgage loans. Thus, the initial layout rises to 45,366 euros on average,, calculated from the estimate of a down-payment of 20% of the property value and an additional 10% for buying costs (notary, taxes, etc.). That amount represents 2.2 times the annual income of a young household (in which more than one person participates and that has at least two incoming wages). Some years ago, mortgages reached – and even exceeded in practice - one hundred percent of the property valuation price, therefore young people often did not find this initial layout obstacle. Now the situation has changed, and the low or negligible savings capacity of young people does not allow them to meet the requirements demanded by the banks in order to grant a loan.

3. Accelerated fall in young homeowners

Thus, the current relationship between the housing system and the socioeconomic conditions of young people is making it impossible to buy a property in order to be able to leave home. If, during the years of expansion of the housing market, there was a considerable increase in home ownership across all age groups, including young people, since 2007 there has been an accelerated decline of young homeowners. In 2008, some 54.9% of emancipated young people aged under 29 years had their own home, versus 26.5% in 2017 (figure 3).

Within this context, there is an increasingly strong emergence of the formula of free occupancy. Many relatives, especially parents and grandparents who are owners of more than one property, are providing one of them free of charge so that young people can leave home. It must not be forgotten that, in past eras, many Spanish families purchased a second home as an investment. As a consequence of this, access to housing via this option in the 16 to 29 age group has increased notably over the last decade, rising from 8.7% in 2008 to 21.4% in 2017.

Among young people aged under 29 years, 48.9% were renting their homes in the year 2017, versus 32.3% in 2008. However, it is precisely in rentals where the biggest increases in property market prices are being registered.

  • Very few young Spanish people are owner-occupiers. Barely 26.5% have the financial resources for this. Economic precarity leads them increasingly towards rental if they want to leave home: nearly 50% are in this situation. Another option is family support and, thus, there are increasing numbers of young people occupying a property provided free of charge by their family, an option that is almost equal now to the percentage of young people who own their home. Only a minimum number (3.3%) access some kind of rental at a lower price than the market, a rental that is promoted by public bodies.
     

4. High-priced rental as the only solution

Beyond help from the family, for the majority of young people the only route to accessing housing is through rental. There are an increasing number who take this option: 48.9% of young people aged under 29 years were renting their homes in 2017, versus 32.3% in 2008.

An emerging force is the free occupancy formula. Family members who own more than one property offer one of them free to enable their young relatives to leave home.

However, it is precisely in rentals where the greatest property market price increases are being recorded. In fact, it is greater demand from young people that is pushing up average rental prices. And, given that proportionally there are more young people renting than people in the other age segments, it is precisely this collective which is most affected by the price increases. This forces many of them to house-share while renting because, as happens with purchase, the proportion of income that young people must allocate to paying rent is out of their reach if they are on their own. As for rentals below market prices promoted by public bodies, only a minimal proportion (3.3%) access this option.

The maximum monthly rental payment for a property for it to be equivalent to around 30% of the net average wage of a young person in 2017 would be 269.51 euros. But the reality is that the average rental price of a property in Spain is close to 800 euros per month (Emancipation Observatory 2017).

  • The upwards tendency is accentuated, especially, in cities and autonomous communities with bigger urban concentrations such as Madrid, Catalonia, and the Balearic Islands, where it is causing important increases in prices in contrast with other less populated autonomous communities.
     

5. Conclusions

The current socio-occupational conditions being experienced by the majority of young Spanish people prevent them from being able to access home ownership. Today, barely 27% are homeowners, which represents a fall of over 50% with respect to the percentage of young homeowners in 2008.

With the existing employment precarity and low salaries, young people face great difficulties in accessing the mortgage market, which forces them to delay leaving home or to move into a rental property. This latter option may be feeding the increase in average rental market prices, especially pronounced in some autonomous communities. Increasingly frequent, too, is the option of free occupancy of properties provided by relatives, an alternative that is growing exponentially, supported by the fact that Spain has one of the highest percentages of owned homes in the world.

The main problem, in the short term, is not so much the need for new housing to be allocated to sale or rental for young people, as the establishment of policies for the rehabilitation and reorientation of the use of the existing housing pool, to adapt it to the needs of a younger population that has no possibility of accessing housing. To resolve this current deficit of access to housing, one (partial) solution could be facilitating the bringing of underused properties onto the market. For this, it is necessary that landlords have legal guarantees relating to the property that they rent out and the returns made from it. These two guarantees cannot be separated. If these conditions are adequately ensured, the rental market would become more dynamic and, as supply and demand become more balanced, this would help to contain prices. A public offering of rental housing for young people (currently non-existent) would also contribute towards alleviate housing problems in Spain.

6. References

This article has been adapted from these studies:

G.A. MUÑOZ-FERNÁNDEZ (2017): “Juventud y mercado de la vivienda en España: análisis de la situación”, Revista de Estudios de Juventud, 116.

More bibliographic references:

BANCO DE ESPAÑA (2017): Encuesta Financiera de las Familias (EFF) 2014: métodos, resultados y cambios desde 2011. Artículos analíticos.

COMISIONES OBRERAS (2018): Generación móvil: una radiografía de la juventud y 10 ejes de trabajo.

IDEALISTA (2019): Evolución del precio de la vivienda en alquiler en 2018.

INSTITUTO NACIONAL DE ESTADÍSTICA (INE): Encuesta de condiciones de vida.

INSTITUTO NACIONAL DE ESTADÍSTICA (INE): Encuesta de población activa. Hogares por régimen de tenencia de la vivienda y edad y sexo de la persona de referencia.

INSTITUTO NACIONAL DE ESTADÍSTICA (INE). Encuesta de población activa. Ocupados a tiempo parcial por motivo de la jornada parcial, sexo y grupo de edad.

MÓDENES, J.A., and LÓPEZ-COLÁS, J. (2014): “Cambio demográfico reciente y vivienda en España: ¿hacia un nuevo sistema residencial?”, Revista Española de Investigaciones Sociológicas, 148(1).

MUÑOZ-FERNÁNDEZ, G.A., L. SANTOS-ROLDÁN and P. RODRÍGUEZ-GUTIÉRREZ (2016): “El mercado español de la vivienda: aspectos demográficos”, Papeles de Población, 22(88).

OBSERVATORIO DE EMANCIPACIÓN (2018): no. 13 (second quarter 2016).

PAREJA-EASTAWAY, M., and M.T. SÁNCHEZ-MARTÍNEZ(2011): “El alquiler: una asignatura pendiente de la política de vivienda en España”, Ciudad y Territorio. Estudios Territoriales, 167.

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Guzmán Antonio Muñoz Fernández, Universidad de Córdoba
Adaptation: Àlex Blancafort

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Thematics

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