By Charles Tan on Monday 13 March 2017
As a bit of a self-confessed geek with a penchant for mathematics, one of the pipe dreams I had growing up was perhaps one day solving a Millennium Prize Problem and winning the million dollars that came along with it. But of course, I never progressed far beyond a precocious aptitude for algebra, never got close to solving a Millennium Prize Problem, and at some point remembered telling myself, “there must be an easier way of making a million dollars”. So, like many of my peers, I ended up working in finance. *cue laughter*
Most of us don’t spend much time thinking about Millennium Prize Problems, which were conceived in 2000, and that is perfectly understandable, since we aren’t mathematicians by training or profession. But one of the big macro issues that has coincidentally developed over that period since the turn of the century, is the widening intergenerational wealth gap or something one could term the “Millennial Price Problem”.
There is no precise criteria for what constitutes a millennial, but the generally accepted definition is anyone who was born after 1980 and thus reached adulthood in the new millennium (i.e. after the year 2000). This particular demographic is interesting because millennials are the most highly educated, culturally diverse and arguably savvy of all the generations, but have also been the most unfortunate; they were hit hardest by the global financial crisis of 2008 and benefited least from the subsequent liquidity-driven rebound.
The problem, to summarise crudely, is that millennials face a double whammy of declining employment prospects and runaway asset values, which means that their ability to accumulate investment capital and participate in the fruits of economic growth is severely limited. Essentially, the price for their labour is coming down, even as the price of just about everything else is going up.
These young adults are graduating with record student loans, entering a workforce with historically high levels of youth unemployment and, even in the cases where they do have decent jobs and a reasonable amount of savings, millennials are finding they come up short -- too short to even get on the first rung of a property ladder, which it seems is being pulled up ever higher beyond their reach.
It is incredible to think that a winner of the $1 million Millennium Prize back in the year 2000, when it was first introduced, would have been able to buy a majestic 2000 sqft condo in Manhattan, while the same extraordinary feat today would yield little more than a c.550 sqft shoebox (see chart above).
Some argue that it doesn't matter since millennials simply don’t have the same desire to own things as their parents and grandparents did; that in an on-demand world where we can stream almost anything at the touch of a button (e.g. Netflix) and the largest real estate company in the world doesn’t own any property (i.e. Airbnb), there has been a paradigm shift regarding the virtues of asset ownership.
That rationalisation, to me, has a sour, grapey feel to it. Because while that may be true for the more free-spirited among us, in my opinion, the millennial generation, more so than the others before it, is aware of the pressing need to save for their own retirement and the importance of owning real assets such as property to achieving financial freedom. Therefore, budget constraints, not paradigm shifts, are a far more plausible explanation for the rise of “generation rent”.
The problem with real estate is that, due to the large quantums, time and effort involved, investing in it tends to be a binary choice - an all or nothing venture. The main alternative is to invest in REITs or other managed property funds, which for a number of reasons (as we expanded on here), are sub-optimal.
But this is where the re-invention and popularisation of crowdfunding, applied to the world of real estate transactions, represents the next logical step in the evolution of investing. By taking advantage of recent regulatory and market developments, and combining it with the immense power of technology to advertise, organise and mobilise, real estate crowdfunding platforms such as ours have made it possible for investors to achieve greater discretion and participate at a more granular level than ever before.
Someone saving to buy a house in a particular borough in London, for example, could today invest in real estate crowdfunding opportunities in that geography, thereby ensuring that the value of his deposit broadly kept pace with house price inflation in that area. In a world before crowdfunding, the same person might have resorted to a highly imperfect hedge by investing in a billion-pound REIT holding predominantly commercial properties diversified across the UK, or worse still, held the deposit in cash. And with real estate-backed “crowd bonds” now allowed to be held within Innovative Finance ISAs (or similarly tax efficient IRAs in the US context), real estate crowdfunding could prove to be an extremely attractive means of generating passive income or long-term savings.
The growth potential of this modern real estate marketplace should not be underestimated, and promises to help solve a number of issues for all parties across the investment spectrum regardless of age, wealth or network. Because the whole purpose of the crowdfunding concept is to provide visibility and accessibility to new investors and newer investment opportunities that historically would have required insider access -- and that is a powerful idea which resonates across the generations: millennials, baby-boomers or otherwise.