Millennials made to wait for transfer of family wealth

Financial transactions within the family are less often a loan than an advance on an inheritance.

The younger family members benefit when they get wealth transferred to them early in life so that compound interest and homeownership can do their magic.

We’ve heard it many times before. Housing has gotten more expensive, and home­ownership rates are dropping among the younger generations. Even double income households take a long time to save for a mortgage. In wealthy families, the bank of mum and dad often helps with the down payment.

These financial transactions within the family are less often a loan than an advance on an inheritance. Wealthy families can afford to transfer wealth from the old to the young when needed.

This can be as little as grandparents buying clothing for the grandchildren, or as big as giving a few hundred thousand (or more) dollars to the kids “to get started in the property market”.

The younger family members benefit when they get wealth transferred to them early in life so that compound interest and homeownership can do their magic.

The advice to individuals would be to openly discuss finances, inheritances, and retirement plans with your family members and then get expert financial help to structure how wealth gets transferred to kids and grandkids over time.

I fear that many, well most, families will shy away from such discussions. Wealth will then only transfer to the younger generation once the last parent, usually the mother, dies.

When might this forced generational wealth transfer take place at scale?

Let’s first count the total female population in the Baby Boomer and pre-boomer generations today.

As of 2021 about 3.3 million women living in Australia were born in or before 1963. When we repeat this count next year there will be about 77,000 fewer women of that age cohort.

Since international migration isn’t a driver for the population over 50, we know these women died. We agreed to massively simplify our modelling for the wealth transfer in assuming women outlive their male partners.

While 2041 will mark peak wealth transfer when 107,000 women born before 1963 die, the 2030s and 2040s will be decades characterised by elevated deaths as well – or to make it sound a bit cleaner: the 2030s and 2040s will see elevated levels of generational wealth transfer with the peak occurring in 2041.

This means millennials won’t be inheriting money at scale for another decade.

They need homes for their young families now though. After procrastinating for a few years (gap years, several university degrees, later marriage etc.), Millennials finally start families at scale. They need three- or four-bedroom houses. After all, their new homes need to fit 1.7 kids and a zoom-room.

These homes are unaffordable to them in the inner suburbs where they currently reside. So, millennials move to wherever they can afford a home of that fits their needs.

Some millennials will move to ­suburbia, some to the urban fringe, yet others will move to regional ­Australia.

The population reshuffle within Australia was driven by Covid, the working from home trend, and millennials reaching the family formation stage of the life cycle.

People left the big cities that were in long lockdowns (Melbourne and Sydney that is) and moved to all parts of regional Australia and the open cities of Brisbane and Perth. In regional towns even a moderate increase of population led to skyrocketing rents and house prices.

The new residents love their spacious regional homes and think of them as cheap since they compare them to metropolitan prices. Regional wannabe first-home buyers (and renters) are getting dizzy when they look at real estate listings.

Millennials can’t afford housing near where they are, and low-income locals can’t afford housing where the millennials move to. There is no help in sight.

At scale, millennials won’t inherit money anytime soon. House prices won’t fall in the inner- and middle-suburbs since there is no appetite in politics to touch franking credits and negative gearing as levers to push prices down. Local powers will do all they can to keep interest rates as low as they can. It looks like we have a decade of squeezing ahead of us. Millennials are squeezed out of their current locations and drive up prices in their new neighbourhoods. This will change in the 2030s.

Millennials start inheriting money at scale, giving them the option to buy or upgrade a home when they are in their 50s.

At the same time baby boomers start downsizing at scale, increasing the number of properties on the market (which should drive prices down somewhat).

What can governments do in the 2020s to help the process along? Infrastructure investment. Lots of it. A city never suffers from “too many people”.

A city suffers from not enough infrastructure and amenities per resident. In the past Australia allowed to grow its population at a much higher rate than its infrastructure. This invited anti-migration sentiment.

The same negative sentiment will be directed against young Millennial families in regional Australia if infrastructure investment isn’t occurring at scale and at high speed.

Simon Kuestenmacher is a director and co-founder of The Demographics Group; research by Hari Hara Priya Kannan