Insight 20 | The Property Market
It needs overhauling from top to bottom! according to Mr Clarke, who says the government’s measures — such as Help to Buy — are not enough to solve the housing crisis. A dearth of housing stock, which has pushed up rents and house prices, in combination with tight mortgage regulations has made homeownership an almost impossible dream for many.
It has also created an enormous divide between Generation Rent and their home-owning parents.
Why does this matter? Because owner occupation gives financial security and that financial security is considered good for the economy. Also, over a lifetime of ownership your costs go down as you pay off your mortgage debt. Whereas if you are renting costs remain high, which could be a problem when you reach retirement age. Arguably with people not now getting on to the mortgage ladder until they are in their 40s, they are not paying off mortgages and building up housing wealth, which affects their spending power and, so, the economy too.
Why is it so difficult to get a mortgage?
The Bank of England has introduced lending criteria designed to prevent another debt-fuelled housing boom. This has resulted in lower loans to values and the need for larger deposits. The average loan to value on a homebuyer’s mortgage has fallen below 50 per cent — the lowest level since before the credit crunch. Across the UK, first-time buyer deposits are now 67 per cent of income, up from 11 per cent in 1985. In London, first-time buyer deposits are now the equivalent of 127 per cent of income, compared with 25 per cent in 1985. Not surprisingly this means it takes longer to save for a deposit, which means fewer people under the age of 35 buy property. Last year the average age of a first-time buyer was 31, with an average deposit of just over £35,000. As long as inflation remains low, the Bank of England is likely to keep mortgage interest rates low. However, this is likely to keep wage increases subdued.
How fast are rents rising?
The average monthly rent in the UK is now £919. This reduces people’s ability to save a deposit. Monthly rents range from £636 in northern England to £2,497 in central London. In Scotland the average monthly rent is £662 and in Wales it is £666. Rents rose by 3.1 per cent across the UK last year, with the east of England seeing the highest growth (from £887 to £945) and central London the lowest. Increased demand for rental homes means that, in 2015, the average property was let two days faster than in 2014 — three days faster in the north of England and the Midlands.
The recent news that house prices in the UK have risen 7.7 per cent in the year to November 2015 was greeted by the Green Party with a call for rental caps and the establishment of a Living Rent Commission to determine affordable rents. Natalie Bennett, leader of the party, says: For young people, this rise in house prices means that the prospect of owning a warm and secure home is at best decades away or at worst an impossible dream. Many are now consigned to expensive and poor-quality private rented accommodation that leaves them with very little money at the end of the month.
What is happening to house prices?
The Office for National Statistics (ONS) House Price Index showed that average UK house prices had increased by 7.7 per cent in the year to November, to £288,000, the fastest rate of annual growth in the past eight months. Rapidly rising house prices are a double-edged sword: great news for those who own properties but terrible for those hoping to buy their first home. This comes just as data indicates that demand for properties rose 7.5 per cent annually in November, while the supply of homes declined 1.2 per cent over the same time period, highlighting the intense level of competition which is at the core of driving up average prices. Worryingly, the most recent ONS construction output data showed that total housing output fell 1.6 per cent in the year to October.
The government needs to implement policies to reverse this damaging trend.
Who owns Britain’s houses?
For many it would be cheaper to buy than rent if they could muster the deposit. Especially when the average household with a mortgage pays £9,116 (£3,667 a year in interest and £5,449 a year in repayments) compared with £10,286 a year paid by those renting. However, rent demands mean many young people find it difficult to save for a deposit. Data shows that the proportion of housing wealth — the total value of homes, not taking into account mortgage debt — owned by the under 35s in the UK has fallen from £1.8 trillion in 1985 to £1.7 trillion today. This represents a fall in the proportion of housing wealth owned by the under 35s from 51 per cent to 23 per cent — despite a 548 per cent rise in house prices over the same period.
The majority of housing wealth is held by those aged over 35, many without mortgages. Mortgaged owner-occupied stock now accounts for one third of the value of all UK housing stock. Older people who don’t have mortgages are cashing in and using their housing wealth — and pensions — to purchase buy-to-let properties (property investors accounted for one in five of all house purchases in 2015) and pay deposits for their children. Conveyancing service MyHomeMove says that, last year, one in twenty homebuyers in England and Wales used a gifted deposit.
How do we solve the housing crisis?
The decline in the proportion of housing wealth owned by younger people has been happening for decades. Government interventions, such as the Help to Buy scheme, are nowhere near enough. Government would have to do something quite radical to reverse the shift in ownership. We need a range of solutions across the board. We need to pay as much attention to those retiring as to first-time buyers. We need more older people to downsize, freeing up housing wealth for younger generations. We may need to put in tax incentives for downsizers because that flow of wealth is crucial. We also need more homes — both rental and owner-occupier — to take the underlying pressure off house prices and rents.