The concept of investing seems very different to when I started. In fact, some parts are unrecognisable. Terms like cryptocurrency and non-fungible tokens (NFTs) frankly intimidate me. Also, I may be wrong, but it seems like these new investment areas are better suited to millennials and the younger generations.
I personally find it hard to look past real estate as the investment benchmark. For one, it’s tangible. Your returns are stable and predictable. Further, if disaster strikes and the market plummets, you still have your house (hopefully!).
Now it came as a surprise to me that millennials tend to agree with me, per a US survey conducted in 2019. Real estate was the prevailing long-term preference for millennials, followed by low-yield savings options and then the stock market.
This piqued my interest in finding out the reasons why young people prefer real estate over other asset classes. Here are some of my thoughts on why millennials feel like real estate is a winner:
Millennials have bad memories of the stock market
There is a timely justification as to why millennials prefer real estate over stocks. When most millennials were entering or about to enter the workforce, they were hit by the global financial crisis, the largest economic disaster since the Great Depression.
With the stock market effectively cratering, one may argue that millennials lacked confidence in equities and securities. The likely alternative investment vehicle during this time would have been housing. However, let’s not forget that the housing market (particularly the loans that underpinned this market) was a pivotal contributor to the economic crisis. Furthermore, house median prices also declined by more than 15 percent during the 2008-2010 period.
Millennials’ preferences may be influenced by their parents
So it cannot just be historical bias. Perhaps familial bias also has a large role to play. It should come as no surprise that I strongly encouraged my son to invest in real estate, once he had a stable income. However, this was the case with most of our family friends, who also advised their children to favor real estate over stocks.
The reality is that my generation received plenty of reasons to be dissuaded from the stock market. Even before we braced the GFC, we went through Black Monday in 1987, the Japanese asset bubble and the Dot Com Bubble.
As such, we impressed that prejudice upon our millennial children. Further, we were complimenting real estate as much as we were criticising public equities. Let’s just say the phrase ‘as safe as houses’ was a common one in our house.
There are some misconceptions of both asset classes
Finally, there may be misconceptions that influence millennials’ perception of the stock market, as well as the real estate market.
When speaking to stock market objectors, they always mention that you could lose every invested dollar. Of course, this is highly unlikely to happen.
For instance, I can see you losing everything if go all-in on one risky stock, or are a short-seller. However, if you invest in a broad-spectrum portfolio, the chances of you losing all your money at once becomes remote.
Alternatively, you can certainly lose everything in real estate. You will most likely require some financial leverage to access real estate. This leverage has strict covenants attached to them, and failure to adhere to those covenants can have severe personal and financial consequences.
So the reality is that both asset types are subject to economic forces and follow cyclical patterns. However, stock market downturns are arguably more publicised than real estate downturns.
* * * *
As a former sales representative and current investor, I’m thrilled to hear that the younger generation trusts their wealth in real estate. However, I would caution any young investor who believes that real estate is a preferred investment vehicle to other assets.
When done correctly, real estate can provide a stable long-term option for wealth creation. I will continue to remind my son of this, particularly when he tries to explain cryptocurrency to me!
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.