Lenders need to ‘think creatively’ to sustain the home-ownership dream
Published: 1 July 2016 | Author: David Willetts, Resolution Foundation
In 2012, the British Social Attitudes survey showed that given a free choice 86% of the population would prefer to buy their own home. That is an even higher figure than CML surveys, which have consistently shown the figure at around 80%. Owning clearly has many advantages: it offers the welcome prospect of security of tenure, as well as an opportunity to build up wealth over time.
But while home-ownership is a widely held ambition, it is one that has proven increasingly hard to realise in recent years. The figures speak for themselves. In 2002, 70% of working age households owned their own homes; today, that stands at 58% (and it is worth noting that a growing proportion of these households are mortgage-free).
Unlike most trends, this one has an obvious explanation: runaway house prices. New research released by the Resolution Foundation this week shows that, since the early 2000s, house price increases have rapidly outstripped earnings growth by close to a factor of five, opening up a significant wedge between the two.
Saving for a deposit
This has generated an affordability crisis for those (mainly younger) people who have come later to the home-ownership game. First-time buyers face much higher barriers to entry: in the late 1990s, a low to middle income household saving 5% of their disposable income took three years to save for an average-sized deposit. Today, that stands at 22 years.
Small wonder, then, that younger people today are significantly less likely to buy a home than previous generations at the same age. In the early 2000s, around 35% of households headed by a 25-year-old owned; 15 years later, that stands at below 20%. And it is not the case that younger people are deferring house purchases but simply catching up at a later date: close to 65% of households headed by a 30-year-old owned in the early 2000s, down to below 45% today.
Owning or renting?
Locked out of home-ownership, younger people are now increasingly likely to rent in the private sector. But this takes a toll on their living standards both in the short and the longer term. The Resolution Foundation research shows that private renters spend a larger share of their income on housing costs compared to all other tenure types, including mortgagor households. Their income after housing costs is eroded, leaving them with less for other daily expenditure and less to save for a future home.
And a real sense of resignation is setting in. The latest Bank of England NMG survey shows that 46% of non home-owners now never expect to buy. When asked to explain why, the number one reason respondents cited was the barrier presented by deposits and other purchase costs.
But servicing a mortgage ranks highly, too. Even if younger households find ways to overcome the deposit hurdle (buying as a couple or as a group of friends, for example, or ‘borrowing’ from the bank of mum and dad) they face other obstacles. The NMG survey shows that a third of non-owners are put off purchasing by the amount of mortgage debt they need to take on, while a similar number say lack of access to credit puts paid to their home-owning dream.
What can lenders do?
This should be of grave concern to the industry (as well as those locked out of home-ownership). So, what can lenders do to help younger people get a foot on the property ladder? Longer-term mortgages are one response, letting households spread costs over more years than products have conventionally allowed. Improved and more flexible support for those wishing to buy on a shared ownership basis would also be a sensible option.
But while due diligence is paramount, there may be a case for lenders to look more creatively at their products, given the realities of young people’s lives today. When secure jobs are increasingly a thing of the past, and indebtedness increasingly the norm, perhaps it is time for lenders to think through their criteria and approval processes and check they are fit for purpose for young people today.
Lower house prices
Recent events, of course, might also come to their aid. There are widespread reports that the Brexit vote could precipitate a fall in house prices. One the face of it, this could be good news for younger people currently unable to buy. But it is unlikely that a house price fall would happen in isolation. If incomes were to follow suit, affordability would remain as much of a pipe dream as it is today.
A house price fall would also have effects on those who have managed to get on the housing ladder in recent years. Resolution Foundation’s new work is once again instructive here, showing how households who have bought more recently carry a larger burden of debt than previous cohorts. A rapid house price fall – rather than the gradual correction most would like to see, whereby incomes catch up with static or gently deflating prices – would leave these households highly exposed, if not yet in negative equity territory.
Those younger people who did vote voted overwhelmingly for the UK to stay in the EU, but a striking 64% of 18- to 24-year-olds expressed their views by not voting at all. The disaffection of the many younger people unable to realise ambitions such as home-ownership may be an important factor behind the Brexit vote that we all have an obligation to address.
Our most recent research on tenure aspirations, published in April 2013, showed that 79% of those adults polled aspired to be home-owners in 10 year’s time. We are currently updating this research – and hope to publish the findings later this summer.