IFS: Young people struggling with low wages and high housing costs, while pensioners are becoming wealthier

IF volunteer Aleksandra Blawat explains the findings from a new piece of research by the Institute for Fiscal Studies which argues that young people have been the biggest victims of the recessionYoung Man Empty Pockets

The recently released report from the respected Institute for Fiscal Studies, a think tank, entitled “Pay, employment and incomes all fall furthest for young adults” highlights many important issues surrounding intergenerational unfairness.

Young people hit hardest

The report shows that young people have been hit hardest by the recession: their real incomes have fallen by more than those of any other age group. The median household income for 22-30 year olds dropped 13% between 2007–08 and 2012–13, compared to 7% for 31-59 year olds. This was caused by falling employment rates and shrinking real wages: young peoples’ employment rates fell by 4% while their real median pay fell by 15% (despite an increase in the proportion of young people with high levels of education). In comparison, the employment rate among 31-59 year olds has remained unchanged, and real median pay has only decreased by 6%.

Jonathan Cribb, one of the report’s authors, expressed concern over the disproportionately large burden on young adults: “Pay, employment and incomes have all been hit hardest for those in their 20s. A crucial question is whether this difficult start will do lasting damage to their employment and earnings prospects”.

The Intergenerational Foundation shares this concern: due to the effects of the recession and a variety of long-term problems – including an ageing population, high housing costs, falling real wages, and high tuition fee repayments – it looks very likely that today’s young people will be poorer than their parents’ generation.

The IFS’ report points out that over a quarter of today’s under-30s live with their parents, as they are increasingly unlikely to be able to afford a home of their own. Despite the fact that purchasing a house with a mortgage has recently become a lot cheaper because of record low interest rates, homeownership by the young continues to decline, with the number of 25 year olds owning a home having halved in the past 20 years.

The average price of a home has increased threefold since 1997, without an equivalent rise in the average wage. According to the housing charity Shelter, the average UK salary would be £55,296 if it had risen in line with house prices – £29,000 higher than it is in reality. The problem is especially grave in London, where house prices are currently rising at a record annual rate of over 20%.

Rents rising faster than wages

In Mark Wadsworth’s blog post about the housing crisis, he points out that average rent has been rising faster than wages since the 1988 Housing Act, which abolished rent controls. The number of buy-to-let landlords has increased, adding pressure to the housing market. Landlords are seen as better credit risks than first time buyers, helped by the fact that rental income is taxed favourably compared to earned income.

IF’s Hoarding of Housing report argues that the spare capacity available in the homes occupied by elderly households who are unwilling to downsize could help to solve the housing crisis, as it represents an allocation inefficiency in the housing market which exacerbates our national housing shortage.

These factors adversely affect the young generation, who are increasingly forced to rent. According to the IFS report, the proportion of people in an owner-occupying household with a mortgage fell by 10.6% while the proportion of renters rose by 15.5%, between 2007-08 and 2012-13. Owner-occupiers who take out a mortgage can look forward to one day owning their own home outright, but today’s young people who can’t get on the housing ladder will be stuck with the high cost of renting throughout their adult lives: the IFS report argued that “for those who continue to rent, there will not be the same dramatic decline in housing costs over their lifetime.”

Even if they manage to obtain a mortgage, high house prices will translate into large mortgage repayments when interest rates are raised, which may prevent young people from being able to save for a pension. In contrast, the fact that they usually have low housing costs is one of the reasons why current pensioners’ incomes have increased relative to working age incomes, according to the IFS. Unless we can get to grips with our national housing crisis, the growing wealth gap looks certain to push older and younger generations further apart.