Niko Skiadas

Greater Boston is blessed with a wealth of demand drivers for the apartment market. Job, wage and population growth all register well in the black. The broader movement toward urban living has spawned a spectacular wave of new local amenities and civic spaces, creating a virtuous cycle.

But the best forward driver of apartment demand? Young adults who are already living in apartments.

There’s a lot about this conclusion that can be attributed to sea changes in demographics and preferences (think delayed household formation and career mobility), but that’s another column. Instead, let’s focus on some simple but stark math that illuminates the “buy versus rent” dynamic in Greater Boston and the serious challenges facing younger renters.

The Q3 2018 median household income for the 25-to 34-year-old cohort – an imperfect but best-available proxy for a “renter” – is a shade over $84,500.

Over the past five years, the median rent in Greater Boston grew roughly 20 percent to over $2,250 per month, according to Axiometrics. That rent represents 32 percent of gross income, a level at which some economists would classify a person as “rent burdened.”

During that same five-year period, however, the Greater Boston median home purchase price rose 50 percent faster, to over $470,000. If we presume 90 percent financing at prevailing rates, and add allowances for taxes and property insurance, the median homeownership payment represents 35 percent of gross income.

Importantly, owning would have been quite a bit cheaper than renting last year. This is due to changes in the 2018 tax code which modified how homeowners are taxed. Using the same set of assumptions, but applying the 2017 tax code, the same median homeownership payment would have represented 31 percent of gross income.

Costs of Aging Housing Stock

Unfortunately there’s a significant additional cost associated with purchasing that median home in Greater Boston. Statewide, Massachusetts has the oldest average housing stock at over 57 years. Indeed, only 9 percent of our region’s for-sale housing stock was produced since 2000. This implies that our “median” house is a fixer-upper and may require anywhere from an additional 5 percent to 25 percent of the purchase price in necessary repairs and upgrades in the early years of homeownership. Capitalize these incremental expenditures into the total basis and the monthly homeownership payment could well exceed 40 percent of gross income.

Could the spread between the cost of renting (32 percent) and owning (35 percent) diverge further? Absolutely.

For starters, very few units of entry level for-sale housing are being developed regionally. In fact, it’s quite the opposite: the untenable cost structure implied by expensive land, skyrocketing construction costs and expanded inclusionary zoning adherence are compelling developers to largely build dense new, for sale supply at the higher end of cost curve.

Next, the traditional move-up of the last generation’s starter homeowners has generally not materialized. The Great Recession not only damaged the balance sheets of Generation X, causing them to stay in their starter homes, but it completely modified the value system around homeownership. Residential real estate was no longer the no-brainer investment it had always been and much of Gen X has happily remained in their more modestly sized first homes. Today, that lack of available starter homes serves to box out new buyers from the market.

Furthermore – if you can believe it – Greater Boston’s housing could be interpreted as cheap compared with that of many other U.S. markets. Currently, the multiple of median home price to median income in greater Boston is 5.3x. That’s a lot less than many markets, especially West Coast hubs with which we increasingly compete for talent and capital, including San Diego (8.4x), San Francisco (8.7x) and Los Angeles (9.6x). Heck, even Denver has a 5.3x multiple.

Putting aside preferences and demographic trends, young adults in Greater Boston will find it increasingly difficult to enter the housing market in the coming years. With regional homeownership costs requiring significant additional incremental savings, young renters should probably plan to get comfortable in those apartments for the foreseeable future. That is, before Gen Z begins pushing into the rental market and making racket down the hall.

Niko Skiadas is an executive vice president in JLL’s capital markets group.