Stephen Smith

Director, Legal & General Mortgage Club

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Is the dream of home ownership over for a whole generation?

Stephen Smith, director of Legal & General Mortgage Club writes about how the dream of home ownership has turned into a nightmare for a whole generation.

By Stephen Smith, Director, Legal & General Mortgage Club.

The dream of home ownership has turned into a nightmare for a whole generation. Property prices continue to rise and saving for a deposit is becoming an almost impossible goal.

Home ownership is still the favoured tenure for most adults in the UK, shown by regular surveys by the Council of Mortgage Lenders. It’s hard to believe that home ownership is still the favoured policy direction for successive Governments of all political shades. It seems to me that the current direction of travel is in the completely opposite direction.

A recent report by PriceWaterhouseCoopers, “UK housing market outlook : the continuing rise of generation rent” July 2015 (PDF)” said that it is likely that the current level of private renting in the UK, standing at around 19%, will probably grow to about 25% over the next decade.  But more shocking to me is their suggestion that for the 20 to 39 age group, over 50% would find themselves in private renting by this date.  We’ve seen the average age of first time buyers creeping up to the late 30s. And because the average term of a new mortgage is extending too, many people will still be in mortgage debt in their 60s.

Why Is This Happening?

While mortgage rates stay low, the cost of owning a home, with a mortgage, for many people has hardly ever been so affordable. Yet the actual cost of buying a home is proving a significant barrier.  In London, the deposit needed to buy a home is now a staggering 120% of income for first time buyers. Elsewhere in the UK it’s still challenging, at around 80% of income.  Even in one of the lowest house price areas, the North West, it’s still around 50% of income.

But all through the 1980s and 1990s this ratio in the UK was under 20%, with London only a little higher. I’m old enough to clearly remember a Barclays report, twenty years ago, that said it took first time buyers on average one full year to save up their deposit. Now it’s nearer eight years.

And whilst they are trying to save up for a deposit, our would-be first time buyers are quite probably stuck in expensive private rented accommodation.  Data from the English Housing Survey shows that whilst owning a home with a mortgage typically takes around 20% of household income, renting privately takes up to 50%.

It isn’t hard to know why home ownership is declining. We’ve seen a disproportionate rise in house prices over the last four decades. Houses now cost 45 times more than in the 1970s. Had food prices risen in line with house prices, we’d be paying more than £10 for a carton of milk. The rise in house prices is driven by the shortage of new building. For decades we’ve not been building enough new homes, and when demand exceeds supply, prices will always rise.

The Bank Of Mum And Dad

The first way first time buyers are getting a step-up onto the housing ladder is assistance from parents, or other family members. The CML have been monitoring the proportion of first time buyers who’ve had assistance towards their deposit and found it to be around half.  It was as high as 65% in 2011, but the introduction of various Government schemes and the general increase in the availability of 95% loan to value mortgages has seen this proportion fall to around one third today. 

Government Schemes – Merely Demand Side Solutions

There’s two ‘Help to Buy’ schemes mainly aimed at first time buyers: 

  1. Help to Buy One provides an equity loan to people purchasing a newly built home.
  2. Help to Buy Two effectively guarantees the top slice of a mortgage, enabling lenders to lend at higher loan to values. In both cases, the borrower still needs at least a 5% deposit of their own.

    These two schemes have been followed by the announcement of further assistance to first time buyers, the Help to Buy ISA

  3. 3. Under this scheme, due to be launched in summer or autumn of 2015, the Government will provide a “top up” to savings towards a deposit of 25%, up to a maximum of £3,000. The intention is to make it faster for potential first time buyers to save up for their deposits.

We Need More Supply Side Solutions

But all of the above really provides a demand side stimulus to the market – making it easier for more people to get into the market, rather than improving the supply of properties to meet this demand.

One initiative proposed by the Conservatives in the run up to the General Election may address this – that is the ‘Starter Homes’ initiative. Details of this are still being worked out but the stated intention of Government is to deliver 100,000 new homes at a 20% discount for first time buyers under 40, by freeing up developers from planning constraints and levies.  There is some concern that the provision of these starter homes will simply reduce the levels of so called “affordable homes” which developers are currently required to provide on their developments, resulting in no net increase in supply.

Even more worrying is the Government’s planned ‘Right to Buy’ scheme. Shelter said recently that this scheme is “never going to be an effective way of ensuring there are always enough homes”.

A Bleak Outlook For The Next Generation Of First Time Buyers

So the outlook is pretty tough for the next generation of first time buyers.  House prices are still rising, and with them the deposit required to buy, and the lack of new building will continue to exacerbate this.  Those who can benefit from the various Government schemes will do well and will probably be happy, whilst those who cannot may well see their dream of home ownership getting further and further away.

About Legal & General’s mortgage club. At 20 years old, we are the original and largest Mortgage Club in the UK. To date we have delivered around £350 billion in mortgage applications and are considered the key distribution route for lenders. We achieved £40 billion of mortgage completions in 2014 - a 31% share of intermediated mortgages and almost 1 in 5 of ALL mortgages in the UK. We’ve over 8,000 registered members.

To read more about the UK’s housing crisis and our proposed solutions see our Let's House Britain Report. (PDF: 14977KB)