Gen Z and young millennials have found a new way to afford luxury handbags and watches—living with mom and dad, says Morgan Stanley

The record number of young adults living at home with their parents is driving the growth for luxury goods in the U.S. and the West, Morgan Stanley analysts say in their latest report.

U.S. Census data shows that nearly half of all young adults from ages 18 to 29 still live at home, the highest level recorded since the end of the Great Depression in 1940. Morgan Stanley attributes this growth to the rising cost of rental prices, the greater enrollment in higher education, and the delaying of marriage.

According to the analysis led by Edouard Aubin, this structural trend has been “overlooked” in the context of rising luxury spending over the past decade. As older Gen Zs and younger millennials have their rent and food paid for by their parents, their discretionary spending increases, allowing them to buy up more designer handbags, watches, and jewelry.

“When young adults free up their budget for daily necessities (e.g. rent and grocery), they simply have more disposable income to be allocated to discretionary spending,” the Morgan Stanley report said, adding, “We see it as fundamentally positive for the industry.”

Gen Z changing the luxury landscape

The world’s emergence from the COVID pandemic has led to a bumper year for luxury spending. Global sales of luxury goods grew around 22% in 2022, from $305 billion in 2021 to $366 billion this year, according to estimates from a Bain study commissioned by Italy’s Altagamma association of high-end producers.

Much of this rise can be attributed to a new generation of younger buyers entering the market.

“Consumption is back at pre-crisis levels, but it is also a rebirth, since there is a new consumer base that is younger, and some pockets of consumers that have been unlocked during COVID are here to stay and growing, like subcultures and ethnic groups in the U.S.,” said Bain partner Claudia D’Arpizio, coauthor of the study.

Gen Z are expected to account for 40% of the global personal luxury goods market by 2035, according to the trade journal Business of Fashion, and luxury conglomerates are focusing their efforts on marketing to this demographic. Young adults around the world have been “a very strong factor of luxury growth over the past decade,” said Grégory Boutté, chief client and digital officer at Kering.

The headwinds of the East and the West

In North America and Europe, luxury market fears are centered on the fact that young people (more so the ones who don’t live at home) are seeing their discretionary income shrink from inflation and the rising cost of living. But China has a different problem: youth unemployment.

With youth unemployment in China now at a record 20% and economic growth falling below Beijing’s targets, luxury executives are especially worried as high-end consumers in China are a decade younger than the global average of 38.

While China has dominated the Western luxury market for the past 10 years, continued lockdowns from the government’s zero-COVID strategy have almost halved China’s luxury goods market share in the past year due to closed stores and lagging economic growth, according to Bloomberg analytics. The U.S. overtook China as the top buyer of luxury Swiss watches in 2022, and the U.S. market also accounted for higher sales for luxury conglomerates Richemont and LVMH.

“In the U.S., inflation is a huge issue, the major focus of a lot of luxury companies…In China, it’s the youth unemployment rate that’s alarming right now,” Kenneth Chow, principal at consultancy Oliver Wyman, told Reuters.

“This might be the first time that a lot of young adults [in China] are facing [such an] economic impact, so it will be a testing ground on how these consumers are going to spend on luxury items going forward,” Chow said.