Chris Middleton reports on the challenges, problems, and opportunities facing the Financial Services sector in helping young adults manage their finances better.
Young adults face more acute housing and financial challenges than previous generations, says a new report from think tank Common Vision (CoVi). The average age of homeowners has increased and a third of ‘millennials; could become cradle-to-grave renters.
According to CoVi’s research, home ownership has become delayed to later in life: it is not until the age of 34 that more than 50 percent of people own a home, up from 26 in 1997. For the remaining 50 percent it is later – or not at all.
This and related factors pose both problems and opportunities for the Banking and Financial Services sectors in terms of the products they offer to young adults, both now and as they go through life.
“At the end of 2019, the average house price for first time buyers was five times the average gross salary (closer to ten times in London). This has resulting consequences for the deposit required. UK first-time buyers are putting down an average deposit of £32,841, while those in London average a staggering £110,656.
“Research by specialist bank Aldermore found that it would take the average young adult 23 years to save enough for a £50,000 deposit.”
The economic realities for many are stark and troubling. Rising property prices mean that more young adults find themselves stuck in a vicious cycle of spending high proportions of their income on rent and living costs, with less discretionary income to put towards saving for a deposit – and less money to simply enjoy life, of course. On average nearly a quarter of under 30-year-old’s monthly outgoings are on rent.
“Many of the millennials who participated in our focus group view meeting living expenses and paying down debt as a priority over building up savings for the future. This reflects wider research on financial insecurity and precarious living for many millennials,” continues the report.
“The FCA’s 2017 Financial Lives study found that one in nine of 18 to 24 year olds (11 percent) are already in financial difficulty and two in five (41 percent) are only ‘surviving’. Amongst 25 to 34s, 23 percent are in financial difficulty and 44 percent are ‘surviving’.
“The FCA’s analysis highlights that just small increases in rents or mortgage payments would mean that many more would struggle. The negative consequences of the rent trap are more acutely felt by low to middle income millennial earners who make up the majority of renters.”
Indeed, those statistics suggest that, for many young adults, their financial problems worsen as they get older.
Other banking surveys, such as a recent one from Fujitsu (see our previous Transform Finance report), have found that new banking customers favour mobile, digital, and challenger services, which may offer lower-friction experiences and easier access to their money. Therefore the opportunity to help young adults better manage their finances and plan for the future would seem to be significant.
At a Westminster eForum event on Open Banking last year, Richard Rous, Competition and Regulatory Strategy specialist at Lloyds Banking Group, said that the sector’s focus on consumers sharing their data is a red herring, but they will be attracted by companies that offer to help them manage their money.
Targeted financial support to encourage active switching of utility providers and financial products may help young renters to build up their savings and become more financially resilient, says the CoVi report, which adds:
“Meanwhile, support is also needed for new millennial homeowners who continue to face financial security concerns, alongside longer mortgage terms and paying off debt late into older adulthood and even retirement.
“Financial providers and market enablers including the Current Account Switch Service (CASS), which supports those who wish to move their current account to a new provider that better meets their needs, have opportunities to tailor their products and services to these needs.”
More young adults are living in their parents’ homes for longer – many well into their 30s – to save money, with some groups relying on the ‘Bank of Mum and Dad’ to make it onto the property ladder.
Some financial providers are responding with products that are backed or underwritten by the wealth of older relatives, but further innovation is needed for those who cannot access familial support.
However, the combined effect of these trends risks compromising the financial security of other generations, warns CoVi – with older people also facing the challenges of leading longer but more isolated lives, perhaps relying on their children and grandchildren. This would seem to lock both sides into a long-term cycle of co-dependence, based on mutual financial insecurity: young adults reliant on their parents to escape the rent trap in ageing cities – which many can no longer afford to live in – and older generations perhaps reliant on their offspring for care and support. That’s a far from optimistic forecast for large numbers of people.
Among government action, investment, and other initiatives, responding to ‘the age of the renter’ requires a concerted effort from the financial market as a whole to empower young adults to make sound financial decisions today – and better plan for the future.