Housing problems are reaching a crisis point for many of the UK’s millennials, with the goal of home ownership so prized by the British increasingly out of reach.
According to the Institute of Fiscal Studies (IFS), 40% of Britain’s millennials are unable to afford to buy the cheapest home for sale in their area, even with a 10% deposit. House prices in the UK have risen 173% in the past 20 years, according to the IFS, yet over the same period workers aged 25-34 have only seen their wages increase by 19%.
Research by the Resolution Foundation, a non-partisan think-tank, published in April this year forecasts that a third of millennials will live in rented accommodation from the cradle to the grave, without the prospect of ever owning their own home.
A ‘full-blown crisis’
Young British people who are unable to afford to become homeowners in the immediate future are popularly known in the UK as ‘Generation Rent’. Unfortunately, the cost of rent has also soared, with young renters now spending three times more on housing costs than their grandparents did, according to a study in 2017 by former Conservative Minister David Willetts in collaboration with the Resolution Foundation.
Those aged 18-36 typically spend over a third of their post-tax earnings on rent or 12% on mortgages, compared with the 5-10% spent by their grandparents in the 1960s and 1970s, the study found. What’s more, researchers also found that today’s young people are also more likely to have less space to live in, reside in overcrowded properties and have longer commuting times – spending an average of three days more a year travelling to work than their parents.
“Britain’s housing problems have developed into a full-blown crisis over recent decades and young people are bearing the brunt – paying a record share of their income on housing in return for living in smaller, rented accommodation,” says Lindsay Judge, senior policy analyst at the Resolution Foundation.
“While there have been some steps recently to support housebuilding and first time buyers, up to a third of millennials still face the prospect of renting from cradle to grave.”
With Brexit looming, will Britain’s house prices continue to skyrocket and what are the possible solutions to the UK’s housing crisis?
Home ownership preserve of ‘the wealthy’
“Home ownership is increasingly the preserve of those with wealth, or older people who bought at a time when housing was cheaper,” explains Jo Richardson, professor of housing and social research at De Montfort University, in an opinion piece for the ICAEW, an accountancy association. “Some of the wealthy don’t just own their own home, but also others, which they collect the rent on to buy more properties.”
The average house prices in the UK hit £232,797 in August this year, according to data from the Office of National Statistics (ONS), while average prices in London were £486,304.
In August this year, the typical Brit’s gross average weekly pay packet was £569, according to Government data, or the equivalent annual salary of £27,000 a year. Given most mortgage lenders will only lend up to four and a half times an individual’s salary, this puts purchasing property out of the hands of many British people.
Interestingly, despite Generation Rent’s issues, professor Richardson points out that the number of British people owning their own properties has not actually changed much in the past few decades. “While owner occupation, as a proportion of market share, has not changed dramatically, very recently (it has been around 62% for a couple of years) the private rented sector has grown at the expense of the social housing sector,” she says.
Paying the price of Thatcher’s Right to Buy
Margaret Thatcher’s popular Right to Buy policy for council tenants, introduced in 1980 and designed to help poorer people afford their own homes, is frequently blamed for contributing to the current housing crisis. Thatcher’s Government passed legislation enabling council home occupiers to purchase their homes at a discount – currently up to as much as £80,900 in some areas and £108,000 in London.
In 2015, the scheme was extended by David Cameron’s Conservative Government to the 1.3 million tenants in housing association properties – low-cost social housing owned and run by not-for-profit organisations.
Council housing stocks plummet
However, as few local authorities have been able to build enough new homes to replace the ones purchased by tenant occupiers – by 2015, two million families had purchased their council-owned property – Britain’s social housing stock has become depleted.
Last year the number of UK council homes hit its lowest level for 50 years, according to analysis of ONS data by the Independent newspaper. Since 1980, when Right to Buy was introduced, council house stocks have fallen by 69%, having consistently risen before then. Stocks across England, Scotland and Wales now stand at just two million, having more than halved in the last 20 years, with over 170,000 council homes lost since 2010.
The data excludes Northern Ireland which ceased collecting the data in 2014. Just 1,814 new council homes were built in 2016. In 1981 there were five million council homes in the UK. Housing association homes have made up some of the shortfall – increasing from 420,000 in 1981 to 2.4 million in 2015 – but not all of it.
“There is no way to solve our chronic housing shortage without a renaissance in council house building,” says Councillor Martin Tett, the Local Government Association’s housing spokesman, in Independent newspaper.
“For that to happen, councils must have new freedoms to invest in new housing that would quickly generate huge returns for public services and local economies. If councils were free to borrow against their housing assets, they could build the homes that our communities desperately need.”
Theresa May promises new homes
Indeed, in August this year, in her introduction to a new green paper on social housing, prime minister Theresa May promised a “new generation of council homes to fix the broken housing market”. She also acknowledged that towards the end of the 20th century, “council house building virtually came to a halt” and that “we need to get back to the scale of new social housing that will deliver a real difference to communities.”
However, critics complain that there is no new funding being made available or help for local authorities to achieve this. “The challenge for supply is that there is no new funding,” Gavin Smart, deputy chief executive of the Chartered Institute of Housing, told the FT. “We’ve been saying that if we are going to build enough social homes we need to free up councils to play a much bigger role.”
More flexibility for local authorities needed
Currently, local authorities wishing to build new social housing find their hands are tied. Under current regulations, once council tenants have purchased their property, local authorities have only three years in which to use the resultant funds to build replacement homes, after which they are forced to return the money to the Treasury with interest at 4% above the Bank of England base rate. What’s more, they are only allowed to spend up to 30% of the cash on building replacement homes.
In fact, the Local Government Association argues that because local authorities are restricted in how much they can borrow to spend on housing, it is virtually impossible to use funds from Right to Buy sales to build new homes. Research by estate agency Savills this year found that over five years, 60% of councils would be unable to replace any council homes sold under the Right to Buy policy on a one-for-one basis.
Interestingly, in 2014 Scotland’s devolved parliament voted to scrap the Right to Buy policy there, with the scheme ending in 2016.
Pitfalls of the private rental system
Meanwhile, many UK families unable to purchase their own homes or access social housing are forced to rent privately. “Since 2000, virtually all expansion of the UK housing stock has been in the private rented sector,” says John Kay, visiting professor at the London School of Economics, in the Financial Times.
According to Shelter, nine million people in England alone now rent privately, while in 2015 research by consultancy PwC found that two-thirds of 20 to 39 year-olds will be renting their homes by 2025, compared with 48% in 2013, with only 26% on the housing ladder.
Unfortunately, the private rental system is also fraught with other problems for Generation Rent. Some of the properties are in poor repair, while renters can also find themselves at the mercy of rogue private landlords who refuse to return their deposits or make repairs, unfair rental increases and short-term rental contracts, ultimately leaving them at the risk of homelessness. According to Shelter, in 2012 alone there were 85,000 complaints about rogue landlords.
The number of families with children renting privately has also tripled in 15 years to a record 1.8m from just 600,000 in 2003, according to the Resolution Foundation. In 2003, the number of children in owner-occupied properties outnumbered those in the private rental system by eight to one. Now the ratio is just two to one. Millennials also have less access to social housing.
In the private rental market, there is less security than in the social housing market. It’s customary for landlords to be able to give tenants two months’ notice, while a quarter of properties do not come up to decent homes standard. Many tenants are also on six or 12 month fixed-term contracts, meaning substantial rent rises at short notice can also be common. So-called ‘revenge evictions’, where rogue landlords evict tenants for complaining about the poor conditions of their home, are also common.
Government’s Help to Buy scheme
While the British Government has introduced some measures to try to help more people get on the housing ladder, critics say that they have only helped a limited number of households and have mainly provided a boost to Britain’s housebuilding firms.
The initial Help to Buy scheme brought in in 2013 provided an equity loan and mortgage guarantee to help boost first-time and ‘second-stepper’ deposits. For example, the 2016 London Help to Buy Scheme provided applicants with a 5% deposit backed by an equity loan of up to 40% from the Government, enabling them to take out smaller loan-to-value (LTV) loans on properties than a 95% advance.
At the time, former chancellor George Osborne hailed it as “a dramatic intervention to get our housing market moving”.
While the mortgage guarantee scheme has now ended, there are numerous Government programmes, including the Help to Buy Isa (Government Individual Savings Account), into which young people can save money for a deposit on a home and receive a 25% top-up from the Government, up to a maximum of £3,000, shared ownership and equity loan schemes.
Help to Buy for shared-ownership
In the recent Budget, chancellor Philip Hammond announced the extension of the UK Government’s Help to Buy scheme to shared-ownership schemes. The stamp duty relief for first-time buyers purchasing properties worth up to £300,000 is to be widened to cover shared-ownership properties worth up to £500,000.
However, insiders say the Government needs to do more. Helen Morrissey, spokesperson at insurer Royal London said in a statement: “While the extension of this stamp duty relief will help first time buyers to get a step on the housing ladder we would argue that more can be done to make the housing market more liquid.
“While first time buyers can buy a home, what of those further up the ladder who cannot afford to either move to a larger home to accommodate their growing families or those looking to downsize.
“We would urge the government to look at reliefs for those further up the housing ladder if we really want to free up the housing market.”
Government meddling ‘worsening problems’
Other critics say the Help to Buy Scheme has really only helped a small number of those wanting to get on the UK’s housing ladder at an eye-watering cost of £4.5bn to the taxpayer. In 2016, the Government said Help to Buy had assisted 150,000 people in purchasing a property – 80% of them first-time buyers.
However, the Intergenerational Foundation points out that in 2017 there were 4.3m private renters in Britain, and that the English Housing Survey showed that two-thirds of those who used the Help to Buy Scheme in 2014/2015 to purchase a property were already among the top 40% of the UK’s earners.
Help to Buy hikes house prices
What’s more, commentators also claim that the scheme has also pushed house prices up, particularly those of new build homes. Research by housing and homelessness charity Shelter in 2015, published in the FT, found that Help to Buy had increased average house prices by £8,250 – an average hike of 3% on the cost of a British home – by raising total mortgage lending by 8.4%.
While the scheme had little effect on prices in London’s already expensive housing market, where uptake of Help to Buy there was relatively low, Shelter found that it had a major impact on some areas in the Midlands and North East of England. In Leicestershire average house prices were inflated by £19,000, according to the charity, while those in Tyneside increased by an average of £13,000.
Campbell Robb, Shelter’s chief executive, told the Financial Times the research was “proof that Help to Buy hasn’t helped many people at all, instead it’s pushed a home of their own even further out of reach”.
Help to buy ‘mainly helps building firms’
A report by investment bank Morgan Stanley last year found that the main beneficiaries to the Help to Buy scheme were in fact the developers constructing new build homes. While buyers have typically expected to pay a small premium for new-build properties, that premium has “rocketed” since 2013, reports Patrick Collinson in the Guardian newspaper.
Morgan Stanley noted that the “divergence between new-build and second-hand prices is higher than it’s been since records began”, with new-build prices outstripping second-hand prices by 15% since the launch of Help to Buy. The investment bank was concerned that the new-build market was becoming overly reliant on the Government scheme and that, as such, housebuilders’ share price premiums were looking overblown.
Could UK house prices fall?
Despite the seemingly unstoppable rise of average UK house prices, those in some areas of the UK – particularly London – have recently come off the boil. Prices grew by just 0.7% in October 2018, following two consecutive monthly falls, according to mortgage lender Halifax, while in September the number of homes for sale also fell to its lowest point for 10 years.
Commentators believe uncertainty surrounding Brexit is pushing house prices down and putting off would-be buyers. However, there are regional differences – prices are falling for the first time in London but rising in other areas around the UK.
“Annual transactions have now dropped to 3,606, fewer than 70 sales a week,” says Naomi Heaton, CEO of London Central Property, a residential property investment advisory firm. “This is a fall of 16.8% over the year and is 2.7% less than the previous low of 3,704 seen during the Global Financial Crisis (GFC) in June 2009. It is the lowest level on record.
“It is hard to see how this decline in transactions can be reversed until there is an agreed outline plan for Brexit. International buyers, already affected by successive tax increases and now exposed to negative coverage of the current political situation, are holding back.
“Nevertheless, the high value sector is seeing a better performance now. The weakness of sterling and the high absolute levels of discounts available are encouraging homeowners, in particular, to enter the market.”
Economic concerns weigh on demand
However, the recent interest rate hike has also increased the costs for potential homebuyers, making them hesitate to take the plunge. “Few households think that housing is a good investment at present,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, a consultancy, told the UK’s Guardian newspaper.
“The combination of rising mortgage rates and heightened economic uncertainty will weigh on demand over the next six months, ensuring that year-over-year growth in house prices barely exceeds zero.”
The outcome of Brexit next year is likely to determine whether the Bank of England will raise interest rates once again. Currently a move in either direction is possible, says Laith Khalaf, senior analyst at Hargreaves Lansdown, depending on the outcome of negotiations.
“Markets are now pricing in a rate rise in the middle of next year, though between now and then we should get greater clarity on the size and shape of Brexit, which makes monetary policy in the next twelve months unpredictable,” he says.
“It’s worthy of note that the Bank of England says its response to Brexit could be to shift policy in either direction. So it could cut rates if it sees a disorderly Brexit damaging economic growth, though it might be forced to hike rates if there’s a run on the pound…The range of possible permutations serves as a reminder of the difficulty of predicting the financial effects of something as dynamic and complex as Brexit.”
The regions rivalling London as hotspots
Meanwhile, many of the UK’s more affordable regions are growing in popularity with home purchasers and, as a result, seeing house prices rise.
Over the last 12 months, house prices in 20 UK cities have increased by an average of 3.9%, according to a report by property market intelligence provider Hometrack.com, with much of the growth seen in towns in the Midlands and the North of England, including Manchester, Liverpool and Nottingham.
Average prices in Liverpool have risen 7.5% to £120,100, while house prices in Nottingham, Manchester and Leicester have all increased by rates above 6%, with those in Glasgow up 7.2%.
Regional prices still below 2007 levels
However, despite the growth, prices in many of the UK’s regions still lag their pre-financial crisis levels, with those in Liverpool still 4% lower than in 2007 and those in Belfast – particularly hard hit by the recession – still 41% below 2007 levels despite a 4.8% rise this year. Prices in Aberdeen fell 3.8% this year – a third year of decline.
“This highlights how local economic shocks can result in price falls, even though house prices are growing nationally,” the report said.
Bank of Mum and Dad
Millennials who are able to are frequently getting help from the so-called ‘Bank of Mum and Dad’ and raiding their parents’ savings in order to get on the housing ladder, recent Government acknowledges. Last year the Government’s Social Mobility Commission found that a record number of first-time buyers were using inherited wealth or loans from their parents to fund property purchases.
In 2017 more than a third of first-time buyers in England (34%) said they borrowed or accepted money from their family to help them buy a property compared to 20% in 2010, while one in 10 relied on inheritance to do so.
Researchers say that the difficulty in purchasing a home is making social mobility in the UK more difficult to achieve. “Going forward, the gap is likely to continue between those in the UK who can acquire that most significant of financial assets, the family home, and those who cannot,” said Dr Paul Sanderson, from Anglia Ruskin University, which assisted with the research.
“Only better-off young people and those who have parents who have already accumulated housing wealth are likely to be able to consider home-ownership without radical changes to the housing market.
Possible solutions for Generation Rent
So what are the solutions for tackling Britain’s housing crisis? Housing experts suggest that building more affordable housing is the key to getting more people on Britain’s housing ladder.
“Investing in building genuinely affordable homes, not more piecemeal schemes, is the only way to give back hope to all those bearing the brunt of our housing shortage,” Campbell Robb, CEO of Shelter, told the Financial Times.
Indeed, the charity says that Britain is only building around half the amount of homes it needs a year and that it needs to be building 250,000 annually. “These seem like big numbers, but a failure to reach it will mean rents and house prices will just keep on rising; and more and more people will continue to need Shelter’s help,” says the charity on its website.
It also wants to see the house building market “shaken-up”, with more companies involved, while Britain’s planning laws also need to be relaxed and more garden cities built. “We also need to get more builders building,” it says. “At the moment just a few companies are in control of building new homes. That means they can control what gets built and when – and they aren’t delivering what’s needed. The market needs a shake-up, and we need to make sure local authorities can also start building homes again on a bigger scale.
“Finally, we need to make sure those hoping to build homes aren’t held back by restrictive planning laws, and that they can find enough suitable land in the right places to build on. Changing these areas, and finding investors willing to put more money into house building, will help to create a new wave of garden cities and new towns across the country.”
Indeed, in its 2016 report the Social Mobility Commission urged the Government to commit to building three million homes over the next 10 years, with a million of them being commissioned by the public sector. It also recommended that the sale of public sector land for new homes be expanded and – controversially – that targeted house construction be permitted on green belt land.
Other recommendations included modifying the starter home initiative to focus on average income households and make these homes, when sold, to be available at the same discount to other low-income households.
Replenish social housing stocks
Jo Richardson, professor of housing and social research at De Montfort University, says more Government money must be invested in building social housing to be kept in public ownership for those who can’t access the private housing market. She also recommends halting the Right to Buy policy in the UK to stem the flow of social housing falling into private hands.
“Invest government money to build more social housing, and keep it in public ownership for those who can’t access the private market,” she says. “At the moment, ‘personal subsidies’ do not provide long-term assets of bricks and mortar, but instead go into welfare payments which, through rental payments, can ultimately boost profits for private landlords.
“Disrupt the flow of public housing into private hands by halting the Right to Buy, which allows eligible social housing tenants to buy their home with a discount of up to £108,000 (£80,900 outside London). The Local Government Association refers to a “firesale” of social housing, with over 55,000 homes sold under RTB in the last six years.”
Renters’ lot must also be improved
Meanwhile, the private renting market must also be overhauled, say commentators. “If we want to tackle Britain’s ‘here and now’ housing crisis we have to improve conditions for the millions of families living in private rented accommodation,” says the Resolution Foundation’s Lindsay Judge. “That means raising standards and reducing the risks associating with renting through tenancy reform and light touch rent stabilisation.
“For any housing strategy to be relevant and effective for people of all ages, it must include this combination of support for renters, first time buyers and ultimately a level of housebuilding that matches what the country needs.”
The Resolution Foundation calls for the housing offer for renters to be improved, suggesting that Britain follows Germany, Sweden’s – and now Scotland’s – example by introducing indeterminate tenancies as the “sole form of contract in England and Wales”, as well as fairer balancing of the needs of tenants with the rights of landlords.
It also suggests that in-tenancy rent rises are “light-tough” and linked to CPI inflation for three-year periods, while a new housing tribunal service to resolve disputes between landlords and tenants is also established.
Shelter, meanwhile, is calling on the Government to make three-year tenancies standard, while professor Richard recommends capping rents and regulating landlords in the private rented sector. The Social Mobility Commission, meanwhile, suggests introducing tax breaks to incentive landlords to agree to longer-term tenancies.
Is renting really a ‘dirty word’?
Commentators are also challenging Britons’ well-known obsession with property ownership and dislike of renting. “The rise of “generation rent” is often ascribed to the unaffordability of house purchases, but this is facile: at current interest rates, renting is not necessarily cheaper than buying a similar property, and for many mobile young people, renting makes good sense,” explains John Kay in the FT. “Policies before the 1980s had simply made the rental option unavailable for those who did not qualify for municipal tenancies.”
In fact, a decent rental market based on European-style controlled rents pegged to median incomes and owned by local authorities or co-operatives is exactly what Britain needs, argues Phineas Harper, deputy director of the Architecture Foundation, in the Independent.
“Across Europe rent has for decades been seen as a valid and important part of the housing market,” he says. “Re-thinking renting has the potential to foster much-needed new house building and create sustainable and affordable neighbourhoods.”
Indeed, it is high time the British let go of their unhealthy obsession with home ownership, says Harper. Years of successive Government policy have conned the British into believing home ownership is the holy grail of domestic aspiration, saddling families with the burden of life-long mortgage repayments. Brits are now among the most indebted on earth, with private debts totalling £1.45 trillion…To build a better rental culture, the British need a better deal on the table with European-style tenants’ rights at its heart.”