The latest survey by the Institute for Fiscal Studies (IFS) indicates that four out of ten young people still cannot afford to buy even the cheapest property in their home area – even if they are able to scrape together a 10% deposit.
Compared to data from the 1996 survey, when nine out of ten 25-34 year olds with a 10% deposit could purchase a house in their local area, this is a massive decline. There are calls from surveyors and estate agents for the government to make some ‘urgent’ changes to property to help the younger generation get on the property ladder.
The huge problem for home buyers, whether stepping on to the property ladder for the first time or upsizing, is the higher house prices. Even though mortgage rates have fallen to record low levels and show no sign of rising despite the base rate increase of 0.75% in August, buyers cannot stretch to property in some cases.
On average, house prices are six times the amount of earnings across the UK, according to Nationwide. This is not taking into account the more expensive parts of the country. The Royal Institution of Chartered Surveyors (RICS) has called for an overhaul of property taxation after a survey they conducted showed that older property owners are often put off from downsizing by the cost of moving home which, in turn, clogs up the property market.
Stamp duty can be a real sticking point, causing a supply ‘bottleneck’ as existing homeowners are choosing to stay put rather than spend thousands of pounds moving home. Estate agents say that people overall are making fewer house moves over their lifetime, often due to the ‘hassle’ involved. The RICS has said that, if it was easier for people to downsize from larger family homes once children have ‘flown the nest’, the benefit to the housing chain as a whole would more than likely speed up the buyers’ market for all.
The government is rumoured to be looking into plans to give some form of tax break for selling property to long-term tenants who wish to remain in their property. Ministers are considering offering 100% relief from capital gains tax when owners of buy-to-let homes sell to tenants that have lived in the property for a minimum of three years.
Unsurprisingly, the significant fall in home ownership over the past 20 years, is mostly due to the rise in house prices. In 1997, homes were comparatively cheap due to the house price crash in the early 1990s. Values fell substantially from the late 1980s peak, with many people left in negative equity or losing their homes. However, since the comparative bargains of 1997, property prices have jumped by an average of 173% and, in London an average of 253%.
The IFS said: “Rising house prices have benefited older generations at the expense of younger ones and increased inter-generational inequalities.”
The Nationwide’s house price index indicates that homes are almost as expensive compared to wages as they have ever been.
Saving a deposit and getting a mortgage
The main obstacle to buying a home for the majority of people is saving that crucial deposit. Even if a new buyer could save everything they earn for six months, not taking into account bills or living costs, the vast majority could not raise the minimum deposit required. Indeed even if they accrued a 10% deposit many would still find themselves locked out of owning a property.
The IFS said: “In 1996, for almost all (93%) young adults, borrowing 4.5 times their salary would have been enough to cover the cost of one of the cheapest properties in their area, assuming they had a 10% deposit. But, by 2016 this figure had fallen to three in five (61%) across England as a whole, and around one in three (35 per cent) in London.”
It is a lot easier to obtain a mortgage if you are a couple, due to the extra earnings. However, if you are single, a one parent family or a couple where one person does not work, then you are very limited.
So, what can be done?
The Institute for Fiscal Studies said: “Increasing the supply of homes and the responsiveness, or elasticity, of supply to prices is crucial. Planning restrictions make it hard for individuals and developers to build houses in response to demand. Easing these restrictions would reduce, or at least moderate, both property prices and rents, boosting home ownership and benefiting renters who may never own. Without greater elasticity of supply, policies to advantage young adults in the housing market will in part push up house prices and will not help – and could even harm – those young adults who will never own a home.”
However, the UK’s current system of building new homes does not bring down prices, so this alone is not the answer. A major piece of research in the Letwin Review, published earlier this year, highlighted how developers tend to price new properties at a premium and deliberately build slower so that new builds do not drag down the value of existing housing stock.
Talk to a mortgage broker for advice on how to improve your situation, and start saving as soon as possible. Bear in mind that there is a wide range of schemes available to help and advice online, too.
If you are fortunate enough to buying a new property, in London or elsewhere in England and Wales, make sure you ask a RICS Independent Chartered Surveyor to inspect the building. Identifying defects before purchase will help you and the seller to agree a price where you can still afford to carry out any necessary remedial work.