Generation rent explained; homeowner options
Though the British economy has grown since 2010 by 10%, and the employment rate is now as high, at 74.4%, as it was in 2005; young people are unlikely to own their own home until they are 40 years’ old – hence the term ‘generation rent’. And despite job creation continuing to improve, the number of working families that also rent is growing as well. The lack of home ownership would not be a problem, if affordable housing was available to working people, young or old, with or without families. But housing is getting less affordable in real terms, particularly in urban areas where job concentration is high. The number of Local Authority owned houses has fallen by half since 2001. Of the 2m jobs created since 2008, two-thirds of them are in London where houses cost almost double the national average. In some London boroughs the ratio of prices to earnings is more than 20:1.
Despite England’s housing stock growing by 1m from 2008, owner occupation fell by 2%, and the private rentals market grew by 1.3m. If we lift the bonnet further, and look at British home ownership by age, we see that 80% of homes are owned by those born in the 1960’s, 70% are owned by those born in the 1970’s, 42% are owned by those born in the 1980’s and 8% only, are owned by those born in the 1990’s (remember houses are frequently owned by two people – hence the 200% total).
Our national obsession with home ownership is understandable given the financial gains that can be made from property ownership but according to Neal Hudson of estate agency Savills “the share of households owning their own home peaked in 2003 at 71% […] and has been in decline since.”
So, what are the options for home ownership?
The government recently launched a first time buyers ISA where single or groups of first time buyers can pool their money to save for a mortgage deposit. This is one of a range of new government schemes aimed at helping families and young couples or groups of individuals to buy their own home. For example a help to buy equity loan enables people to buy a new-build home with a cash deposit of 5%. In addition the government will lend up to 20% of the cost of the newly built home, meaning that would-be homeowners can take out a mortgage for the remaining 75% only. Special government schemes also exist for people and families that wish to buy a new-build in a London borough.
At the other end of the age spectrum over 55’s lifetime mortgages are growing in popularity. This is where older homeowners, perhaps parents or grand parents, want to release equity and house wealth from their homes. The money can be used in a variety of ways, in some cases because seniors or retirees may earn less and therefore cannot borrow money; the funds are needed for home improvements. But, of course, the house wealth could be invested in retirement income and towards inheritance tax planning where house values are high. Another way, that released house wealth equity can be invested by parents and grandparents, is in government help to buy schemes, where deposit money or funds for first time buyer ISAs investment are gifted to offspring.
As an alternative to traditional home ownership, a new housing option favoured by some young professionals that work in cities is: co-living. The Collective is a communal housing development that opened in London in April 2016. The Collective houses 500 residents, with shared cafes, bars, libraries, gyms, gardens, social and hot desk working spaces.
Are we more in debt because of high house prices?
Just before the 2008 crisis British household debt as a percentage of income peaked at 160%, average debt per household was at £64,000 after adjustments for inflation. The figure had fallen to 140% by 2014, and the number of Britons spending a third of their income struggling to pay off unsecured and mortgage debt had also fallen by 3% from 2008 to 2015. If we take a closer look at mortgage debt; interest rates have fallen to historical lows. Excessive mortgage lending was curbed following changes to legislation in 2014, and banks favour repayment mortgages not interest only mortgages. Just 1% of new mortgages were interest only in 2015 whereas in 2007 a third of all mortgages were interest only loans. This has contributed to fewer households being unable to pay their mortgages. This would suggest that most Britons have applied austerity measures to themselves. We should remember that the 2008 crisis was not caused by banks’ excessive domestic mortgage lending; the cause was excessive lending to the commercial sector. It is not just price that is fuelling the generation rent trend.
Young people spend longer at university in Britain, and may prefer to rent so that they can live where the better jobs are. Growing workplace skills deficiency would indicate that being well-education and gaining experience will pay off in the long-term. Today’s richer retirees are well-educated professionals that can still command high salaries for ‘service’ related work in the finance, tech, engineering and consultancy sectors. For generation rent other income investment options such as Stocks and Shares Investment Savings Accounts (ISAs) may help them prepare for a lifetime of flexible and varied work.