If Gen Z and younger millennials give up on homeownership, their attitudes toward savings and investment are likely to change—and the attraction of gambling on speculative instruments increases. (ddp)

The past few years have experienced growth in some very specific forms of speculation. The increased prominence of crypto and meme stocks (equities whose value is driven by social media promotion rather than anything economic) owes much to speculation. There are various drivers of this—a belief that the offering is something new, a “post-truth” approach to investment commentary, and of course a lack of (or a disregard for) regulation.

The defining characteristic of crypto buyers is their youth—recent research by the Bank for International Settlements (BIS) identifies Gen Z (born 1997 to 2012) and younger Millennials as the key buyers of crypto. The second characteristic of crypto identified by the BIS is that the buyers show strong speculative instincts. That is to say, it is when prices are rising that new buyers are active—and a rising price encourages more activity. These two trends—younger people, choosing to gamble—might be tied to national housing markets. Changing housing affordability is likely to have a profound effect on consumer saving behavior.

Rolling the dice—when property is unaffordable

In most countries, housing is the single most important asset most households will own. Young people starting on the property ladder require a cash payment, and that cash payment is not something to gamble with. But this raises a critical question. What happens if buying a house seems permanently out of reach? If homeownership becomes unaffordable for the young, the motives for and risk appetite around saving will change.

In several economies, younger people are now significantly less likely to own a home than people of the same age in earlier generations. House prices have been rising faster than consumer price inflation for almost a decade—raising the house-price-to-income ratio. While lower mortgage rates may mean that monthly mortgage payments have risen less than real house prices, the amount of money required for a deposit in absolute terms and as a share of income has risen.

In the US, a majority of people aged 18 to 29 years now live with their parents—the first time since the Great Depression that has happened—and just over 60% of US households headed by someone under 35 (i.e. not living with their parents) are renters rather than owners of the property.

If homeownership is unattainable, there is no necessity to hold low risk savings for a deposit, legal bills, and other homeowner expenses. In other words if Gen Z and younger millennials give up on homeownership, their attitudes to savings and investment are likely to change—and the attraction of gambling on speculative instruments increases.

The lure of the casino

But speculation is not the only option for those unable to afford a home purchase. The alternative is consumption of goods and services, or perhaps what an economist would refer to as “the consumption of leisure” (which means “working less”). There is evidence in Japan from the 1990s that younger renters, who had decided not to aim for homeownership, would spend 30% to 40% more than those who still clung to the (distant) dream of being a homeowner. That means that to attract young peoples’ money, speculation needs to have two characteristics.

First, the speculation must have an element of fun. To compete with consumption (and in particular the consumption of leisure “experiences” like vacations) there needs to be some entertainment in the act of speculating. Crypto and meme stocks help provide that with online discussion groups which create a sense of community.

Second, the speculation must offer the potential for extraordinary rewards. This is an aspect of most forms of gambling—but in this case housing may make this more important. The stereotypical “crypto bro” is a young man in his twenties, still living at home in his parent’s basement with no conventional prospect of homeownership. This sort of person will be attracted to speculation if it holds out the possibility of being able to purchase his own home in the event of the speculation paying off.

If the speculation does not pay off, then provided the speculator has not leveraged in order to participate the cost is not so significant. A wannabe homeowner who speculates with their deposit loses not just the money, but the prospect of owning a home if the speculation fails. The speculator who does not have a meaningful prospect of buying a home has a smaller loss—they just lose the money they put into the speculation. While loss aversion means that the speculator is not going to be completely indifferent, they are also not going to be so negatively affected. The loss can be characterized as the price paid for the entertainment of the gamble.

Speculation looks more rational to a generation that will inherit rather than buy property. As long as homeownership is unrealistic, Gen Z and young millennials are likely to keep speculating—although of course the vehicles in which they speculate may change in the future.

Of more interest, perhaps, is what might happen if housing becomes more affordable in the future. Declining populations and changing patterns of real estate use (e.g. offices converted into apartments) may alter both supply and demand for housing. If that rekindles the homeownership dream for younger generations, the speculation and conspicuous consumption of recent years suddenly acquires a higher cost. Improved housing affordability may end up bursting Gen Z's speculative bubbles.

Main contributor: Paul Donovan

Read the original report - Did housing cause the Bitcoin bubble?, 14 December 2022.

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