A pathway to a home illustration

‘Generation rent’ – a term used to describe the current generation because of the unlikelihood of them ever being able to buy their own home.

According to Home Secretary Savid Javid, the current generation is “crying out for help.” He states: “Without affordable, secure, safe housing we risk creating a rootless generation, drifting from one short-term tenancy to the next, never staying long enough to play a role in their community.”

“Our housing white paper in February set out our broad vision. It described the scale of the challenge and the need for action on many fronts. Since then we’ve been putting it into action, laying the foundations for hundreds of thousands more homes,” he adds.

Henry Pyor is a specialist in property whose is to advise private clients on how to purchase assets and to ensure their emotions don’t result in them overpaying for it; whether that be property, boats, art, planes or even racehorses. His kids best describe him as a “wingman” for people looking to spend money.

Henry told us that purchasing and renting a home is very difficult, “but, it’s not harder than it was when I was 20,” and he adds that while it is now much more expensive to purchase a home, but you also earn a much higher salary.

“My first three-bed cottage outside Cambridge cost £25 a month to rent,” says Henry, recalling his first home. The first property he purchased was a two bed flat in London, which cost “£125,000, but my salary was only £2,000 a year. I didn’t even pay tax on it,” he says. Talking on the difficulties he faced and how they correlate to today’s system of purchasing, he reiterates: “It’s hard now, but it’s always been hard.”

Average wage to average house price chart

Average wage to average house price chart [Nationwide]

HM Land Registry and the Office for National Statistics (ONS) released data that shows the average house in the United Kingdom in 2017 was just under £210,000. The average weekly take home salary was £505. 

In January 2000 on the other hand, house prices were around £85,000, and weekly take home wages were £300, according the ONS.

The 2008 financial crash was sparked due to the housing market. Prior to the crash, when applying for a mortgage, you did not always have to scrape together a large deposit, especially if you were in a stable career. Getting a mortgage was fairly realistic for most people as lenders were accepting the majority that applied, assuming house prices would continue to increase.

In a video interview Adam Tooze, a professor at Columbia University, and author of Crashed, stated: “Banks are fragile things, classically we think of them as being funded by deposits with households putting their savings in their bank. People began to panic and take all their money out.”

The collapse of Lehman BrothersAmericas fourth largest investment bank, sparked a domino effect on the financial industry. “Banks like Lehman don’t have deposits, they borrow money from other banks and that money runs faster than any deposited money can run,” says Tooze. Although Lehman wasn’t the only bank to go bust, it was the first and was brought down by debt and lack of cash flow.

Many Americans, including lenders, believed house prices would only increase, so finance companies would offer mortgages to just about everyone. When Lehman’s filed for bankruptcy, the government decided not to bail out the company, which, Adam claims, made banks scared to lend to each other.

As soon as banks stopped lending to each other, problems begin to arise: “A modern economy can’t function without credit for more than even a couple hours, frankly a couple of seconds,” Tooze said when discussing the structure of the collapsing financial institutions.

 “The failure of the Irish banks in September 2008 was really the moment where the panic spread to Europe”
Adam Tooze

Although the financial crash was rooted in America, it soon went global: “The failure of the Irish banks in September 2008 was really the moment when the panic spread to Europe, European countries found it almost impossible to handle. All European banks are tied up in the Irish banking boom as they use Dublin as an offshore financial centre.”

As a result, Dublin found itself in a position, on September 29, of having to guarantee the entire balance sheet of the Irish banking system. The crash did not just effect banks: it devalued currencies. Making it much more difficult to make purchases. Many people were also made redundant.

President Bush’s attempt to bail the banks out was rejected by Congress, but fortunately for them, the Federal Reserve ended up being a last resort lender to the world’s financial institutions. This had a knock-on effect to Europe, and arguably saved economies across the world.

After the crash, it became common for banks to lend money with a much stricter system. To be able to get a mortgage you must put a 10%, or, less commonly, 20% deposit, depending on the amount you were borrowing. The banks would then formulate your salary and credit history to see whether they believe you would be able to pay off the remaining instalments comfortably.

Banks and lenders are currently prepared to lend between two-and-a-half to five times your salary, if your career is stable and credit history is good. But, each bank has a different list of criteria to test whether you are eligible.

For example, Barclays Premier offer a no-deposit mortgage that allows you to borrow up to 5.5 times your salary, but you’ll need enough of an income to cover your mortgage and other outgoings; making the eligibility test more difficult.

However, there is a catch. This mortgage only suits those with reasonably well off parents. In order to be accepted for this mortgage, your parents must have 10% of the property’s value in a ‘special savings account’, the money is held in their name, then in three years time the money will be returned with 2% annual interest added, as-long as their child keeps up to date with mortgage payments.

According to the Bank of England official bank rate history, interest rates for mortgages across the UK had been fluctuating prior to the financial crash, specifically between the years of 2003 until 2007. Interest rates raised significantly to battle the over-inflating economy. Interest rates went from a steady 3.5% in July 2003 to 5.75% percent in July of 2007.

As a result of the economic crash, interest rates crashed to the lowest of lows. From 5.75%, it plummeted to 0.5% in March 2009, with another step down to 0.25% in August 2016. Since then, rates have had a small step back to 0.5% in November 2017.

Home ownership among young people has collapsed [English Housing Survey]

The English Housing Survey (EHS) shows people aged between 16-24 years old are much less likely to own a home compared to previous years.

The most common employers of young people are restaurants, hotels and other retail businesses because of their lack of experience and lower minimum wage. It is also common for people in retail to be given a zero hours contract, making their career unstable – which makes it much harder to qualify for a mortgage.

Though the UK has a better unemployment rate than the rest of the EU, there was a big issue with youth unemployment in the UK, especially in areas outside of Greater London. According to the ONS, areas such as Middlesborough, Bradford, Wolverhampton and Swansea still have approximately a quarter of their youth being unemployed.

Youth unemployment by region, stats from ONS

Yellow: 2015, Grey: 2011 Youth unemployment (16-24 years old) excluding Northern Ireland by region [ONS]

From the 2008 economic crash, youth unemployment rates increased. However, since 2013, the rates have settled back down to a similar and stable level, such as those seen prior to the crash. Despite the recovery in employment levels, the homeownership for 16-24 year-olds has not improved to the same levels that were seen prior to the crash and remain low.

First-time buyers in England or Northern Ireland are now not required to pay Stamp Duty on properties worth up to £300,000. However, if the property is worth more, Stamp Duty still applies. For example, if a property is valued at £500,000, then you would be required to pay 5% for the amount between £300,000 and £500,000. If the property is worth more than £500,000, then you must follow the same rules for people who have purchased a home before.

Ellie Black, Assistant manager at Hamptons International in Clapham says the changes in mortgages can be confusing to people that don’t understand the process: “The main thing is the deposit… renting while saving is impossible for most people.”

If you’re seeking advice on the best way to get onto the housing ladder she suggests “looking into help to buy schemes and other government schemes that can help.”

Help to Buy: ISA

This is a programme created by the Government with the aims to encourage and help level the playing field for people who are struggling to save up for a house deposit. If you save £200 every month, the Government will contribute a bonus of 25%.

The maximum bonus you can receive is £3,000. Using this scheme you will be able to boost your ISA savings from £12,000 to £15,000.

Help to buy: Shared Ownership

Another programme for people who can’t quite afford a mortgage on 100% of their home, this scheme offers you the chance to buy a part of your home, and then pay rent on the remaining share. Giving the opportunity to purchase the rest of the shares of your home at a later date.

To be eligible for shared ownership, your household must earn no more than £80,000 annually or £90,000 in London. You must also be a first-time buyer or, if you have a history of home ownership, then you are only eligible if you can no longer afford to purchase another.

The house you’re looking to purchase must be newly built, or it at least is an existing one through resale programmes from housing associations. Shared Ownership properties are always leasehold.

Help to Buy: Equity Loan

The final Government scheme that assists you in getting onto the property ladder, this scheme allows you to lend up to 20 percent of the cost for a newly built home. This means you will only need to acquire a 5% deposit on the property, and 75% mortgage on the remaining shares on the property. The 20% loan the government lends will not require you to pay fees for the first five years of owning your home.

To correlate with London prices, the Government has increased the upper limit of the equity loan to allow people living in London to loan up to 40% from the Government.

27 year-old senior PR manager Niamh Spence and her husband, Rick, a personal trainer, have recently been accepted for a mortgage for their property in Manchester, valued at £200,000.

They were required to put a 10% deposit of £20,000, borrowing £180,000 from a lender. When asked how they found applying for a mortgage, Niamh replied: “I mean, it was fairly straight forward for us, due to being in good jobs and having a substantial deposit.” They sought advice from a mortgage advisor which is what “made the process really easy, especially given circumstances like moving jobs in the middle of the process.”

Rick, Niamh’s partner, used the Help to Buy: ISA while saving for the deposit. However, Niamh stated that they “had to rely on some of that being gifted, as we would never have managed to save that on our own without years of saving.”

Chairman of the House of Lords Economic Affairs Committee, Lord Rollick, criticised the Conservative Government for being “too focused on home ownership.” He advises that we must be building at least 300,000 new homes every year to keep up with demand and solve the housing crisis – 50% more than the Government originally set out to do. It has been over ten years since the Government have built over 200,000 homes in a single year.

A graph showing the rate in which homes are being built

Permanent dwellings completed, by tenure, UK, financial years 1979/80 to 2013/14, [Gov.uk]

“It is very concerning that changes to stamp duty for landlords [the 3% hike in April 2016] and cuts to social rent could reduce the availability of homes for rent. The long term trend away from subsidising tenancies to subsidising homebuyers hits the poorest hardest, and should be reversed,” Lord Rollick said.

According to a survey involving 389 house builders across England, by property consultant McBains Cooper, only three in ten housebuilders believe that the Government’s target to build one million affordable new homes by the year 2020 was realistic.

Those who do not believe it is possible, collected data to show their reasoning. Lack of appropriate or available land: 46 percent, Planning permission process too slow: 40%; finance not available: 33%; skill shortages: 30% and finally, not profitable enough to bother building: 29%.

Chief Executive of McBains Cooper, Michael Thirkettle, stated: “The finding that the majority of housebuilders think targets will be missed is a concern given the fact that more new homes are urgently needed. It’s worrying news for the economy with construction accounting for 6 per cent of GDP, and bad news for the industry as well as those desperate to get on the property ladder.

“The finding that most housebuilders blame a lack of available or appropriate land may concern the Government, as it has said it will give faster planning permission for more construction on brownfield sites, but our survey suggests there isn’t enough brownfield anyway to build the required number of homes to meet the housing shortage.”

During the 2016/17 financial year on the other hand, the Government surpassed their threshold by building just over 217,000 new homes. This is an increase of 15% on the previous year, and up 74% on four years prior. This was previously beaten in 2007/8 when 223,530 homes were built, second highest since 1992.

Interest rates have dropped to their lowest in decades, making paying off mortgages a much more realistic goal for the majority of middle-class families. Despite this, statistics show that less and less young people are getting onto the property ladder.

Renting while saving is deemed impossible for many of the younger generation, unless fortunate enough to have generous or well off guardians who will gift their downpayment for them.

But, with the introduction of the Help to Buy schemes and lowering Stamp Duty for first time buyers, the playing field is starting to be levelled out. Recent figures show a drastic improvement as 2018 saw 370,000 new first-time buyers mortgages completed, a twelve year high since the financial crash.

 

 

 

 


Featured illustration by marthawatton.co.uk or @martha.illustrates