“The idea of owning or renting a safe, secure place of your own is, for many, a distant dream.” Sajid Javid MP, Minister for Communities and Local Government.
The likelihood of stepping on to - let alone climbing - the property ladder is a far-fetched fantasy for a growing number of the UK population. A combination of factors such as rising prices, tighter lending requirements, lengthy planning applications and a shortage of housing stock, has created significant and growing barriers to home ownership.
It’s the millennial generation - those reaching young adulthood in the early years of the 21st century - who are the most adversely affected by these trends.
Over the last decade, according to a report by the Resolution Foundation, the level of home ownership has fallen from 40% to 25% for 25-35 year olds. The decline has developed in combination with a rise in renting and the number of single adults choosing to remain at the parental home reaping the benefits of rent-free living with their parents while saving for their deposit.
In truth, most millennials have little choice in the matter. Both the growth in rental numbers and the reluctance to flee the parental nest are by-products of a lack of affordability. According to the Government’s 2017 White Paper on the housing market, the average British house costs almost eight times average earnings, an all-time record. In 2000, the savings required for a first-time buyers deposit were £7,600, as opposed to figures released last year which suggest an average requirement of more than £22,500. Nationwide Building Society, in its December 2017 house price index report, noted that: “in most regions, it would take eight years for the typical buyer to save for a deposit”. And that’s before factoring in the fees which are attached to buying a property. No wonder the number of people in the private rented market has doubled since 2000.
But what is important to focus on here is not the overall level of first time buyers, but the impact of rising affordability on first time buyers, driving the average age of the first-time buyer up. According to a study from the Office of National Statistics in 1991, 67% of the 25 to 34 age group were homeowners. By 2011/12, this had declined to 43%. There were also reductions in home ownership over the same period for the 16 to 24 age group (from 36% to 10%) and for the 35 to 44 age group (from 78% to 64%). By contrast, home ownership has increased among older age groups.
A recent survey by the English Housing Survey revealed the number of first-time buyers sat at 922,000 in 1995-96. This number has decreased to 654,000 in recent years (2015-16).
The higher cost of home ownership is undoubtedly a driver for the growing proportion of people opting to rent property in the UK.
The issues go beyond being solely financial, and reflect long-term structural problems.
Put simply, the UK has not been building enough new homes for decades. The consensus is that between 225,000 to 275,000 new homes are needed annually to keep up with population growth and address years of undersupply. Yet last year, only 170,000 houses were completed. With demand outstripping supply, prices have appreciated. A number of policies have been put in place by government to restrict the buy-to-let market, encourage saving, shared ownership and help to buy schemes, but these are only now beginning to take effect.
In this environment, UK quoted housebuilders are thriving. Barratt Homes recently announced that sales were up 8.4%, bolstered by the government’s help to buy scheme and the increasing participation of buy-to-let investors. But the private sector alone cannot make up the shortfall of new affordable homes. Historic “right to buy” schemes, introduced in the 1980s by the Thatcher government, have not helped the situation long-term, as they effectively reduced the stock of affordable public sector housing by transferring housing from public to private sector ownership.
The Home Builders Federation, a trade association representing private sector homebuilders in England and Wales, says the private sector can’t be relied on to build enough homes to meet the required demand, and has called for the public sector to step up its involvement.
Sajid Javid, the Minister for Communities and Local Government, has introduced a number of initiatives to improve local planning, land availability, infrastructure and the rate of construction. But it will take time before they bring tangible results. The White Paper also includes improvements to the rental sector. More radical solutions, such as building £50 billion of new homes, have been raised but seem unlikely to be realised by a government with deficit targets to meet.
By 2025, it is estimated that 7.2m households will be privately rented; this is up from 5.4m in 2014. As many as 50% of 20-39 year olds now consider rented accommodation the norm as opposed to home ownership. This shouldn’t come as a surprise. Given an average pre-tax salary of £28,000 and not insubstantial monthly outgoings on rent, utility bills, council tax and groceries, it could take as long as 20 years for the average young person in Britain to raise a deposit for a home.
Younger generations are settling down and starting families later in life than their grandparents’ and parents’ generations.
But there are other reasons for the rental boom. Younger generations are settling down and starting families later in life than their grandparents’ and parents’ generations. Career development may necessitate relocating to different cities, heightening the attraction of rental as opposed to committing to a long-term mortgage. This is particularly pertinent to young millennial singletons; but perhaps less applicable to younger families who are more likely to prefer the stability of asset-ownership in the form of their own property.
Europe has traditionally had a higher rate of rented homes than the UK for decades. In some countries, the numbers who live in rented properties exceed those living in owner-occupied dwellings. In Switzerland, for example, some 56% of the population are tenants rather than home-owners. The US and Asia both benefit from a vibrant domestic rental market, and view the opportunity of investing into the private-rental-sector as attractive.
But in the UK, the prevailing culture is to own your own home.
The Budgets effect
The Government is aware of the crucial role that home ownership plays in the UK and as an important factor for voters. In 2017, Prime Minister May vowed to “fix the broken housing market”. Chancellor Phillip Hammond announced the abolition of stamp duty for first-time buyers of homes worth up to £300,000, saving them up to £5,000. Welcome as this concession is for some, it goes nowhere close to tackling the problem for the great many young people who are still at the stage of saving for their first deposit and covering rising living costs.
Long term consequences
Undoubtedly, the Government is concerned about the political and economic implications of the current UK housing crisis.
There is no single explanation or solution to the current state of the UK housing market. The rise of “Generation Rent” owes its situation to the combination of factors discussed. But as with personal debt levels, changes in housing tenure are affecting the younger generation and young families disproportionately creating a generational gap that will have long term consequences for the economy, politics and personal wealth.
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