Are young homeowners nearing extinction?
It’s no great secret that, despite the economic woes that have been exacerbated by the ongoing COVID pandemic, property prices remain high.
Property experts and economists constantly analyse market conditions attempting to identify the trends, patterns, and fluctuations that affect the real estate market and the wider economy - and the underlying trend of these predictions is that the upward trajectory of property prices remains unsustainable, despite the fiscal interventions of government.
However, the past year has seen an explosive demand among buyers seeking to upgrade, downgrade, or buy their first home; despite the devastating effects that the global pandemic has had on economies and the obvious hardships experienced by workers.
Despite what we’ve all been through over the past 12 months, property prices in the UK have risen by an astonishing 10%, and the US has experienced a 13% increase in the same period.
In more normal economic times, those seeking to get a first foot onto the property ladder would be constantly scanning the market, reading up on the latest market analysis, and listening to the experts - trying to gauge when the right time to buy is whilst diligently saving as much money as they can to achieve their property ownership goals.
But these are not normal times, and it appears that those first-time buyers, who are able to, are desperate to get on that ladder now, seeking to take advantage of high loan-to-value mortgages and low interest rates - ignoring the possible threat of a future crash.
So, what is driving this fever pitch in the market? And what is the outlook for young people looking to get on the property ladder during COVID and beyond?
Why pay for someone else’s property?
If we look at some very basic math, we can see why so many people in the UK want to own their own property. The average monthly mortgage repayment is currently £723, whilst the average rental payment is more than £1,000 per month.
In the US, whilst the margins are narrower with an average mortgage repayment of $1,275 per month against an average rent payment of $1,219 there is still sound reasoning in favour of home ownership.
Generally speaking, home ownership remains a positive long-term investment. Go back 60 years and you will find that the average house price in the UK was £2,530 (approximately £55,784 in today’s money). These days, you would pay that for just a few months’ rent! And that property your parents or grandparents bought for £2,530 in 1961 would now be worth 100 times more as today’s average UK house price is £255,000.
Disposable income
Figures estimate that the average income in the UK currently stands at £29,600 per annum after tax – that equates to more than £2,400 per month – and taking into consideration typical monthly expenses that still leaves a considerable amount of disposable income; making the average first-time buyer’s monthly mortgage repayment of £723 seem highly affordable.
In the US, whilst there are huge fluctuations state-by-state, the average income is pegged at around $53,500 per annum (after taxes) providing a monthly wage of more than $4,400 – and even considering the most extravagant of tastes its more than reasonable to assume there would be enough disposable income left to afford an average monthly mortgage repayment of $1,275.
These figures certainly make home ownership look extremely attractive but, be under no illusions, we are not in some sort of ‘golden age’ for property ownership. In the 1960’s, the average value of property was equal to 2.6 times the average annual salary, in 2021 the average value of property is equal to almost 9 times the average annual salary – indicating property prices have increased at a far faster pace than salaries have over the past 60 years. In fact, if the average annual wage from 1961 had increased at the same rate as property prices, the average annual salary in the UK would now be £96,000.
Cash is king!
Despite the fact that salaries haven’t risen at the same rate as property prices, the figures so far seem to point towards it still being affordable to buy a property right now, but only if you’ve got cash in the bank.
Remember when you could get a 100% mortgage? Scratch that… who remembers the crazy 125% loan-to-value (LTV) mortgage deals on offer during the nineties and noughties?? Thankfully, these lending practices no longer exist but this makes it harder for first-time buyers as it means you need to have money in order to borrow money.
Hey, hang on a minute, I hear you say…surely people want to borrow money because they don’t have money?!? Hmm, maybe 100-125% mortgages could return some day?
Up until recently, UK first-time buyers would need a deposit of at least 10% of the value of the property in order to secure a mortgage – meaning they would need to have more than £25k to put towards their property purchase – not including all the other costs associated with buying a property.
Now that’s a big chunk of change for anyone, but again, if you break down the math, the average person in the UK on the average wage with the average outgoings and expenses could theoretically bank that £25k within 2 years.
And in recent years it seems we have become a nation of savers as the current average mortgage LTV for first-time house purchases is 82% - meaning the average first-time buyer has accumulated an 18% deposit or almost £46,000.
Not everyone fits the mould
Up until now we’ve been using very simple rule-of-thumb maths, based on ‘country average’ statistics. In both the UK and US, these average statistics can fluctuate quite drastically between counties and states and given what we know about the wider economic challenges we’re facing, it is safe to say there are a lot of people whose circumstances fall far short of these averages creating insurmountable obstacles to home ownership.
In general, it is younger people who fall short of the statistical ‘average’ as they are not yet at a stage in their careers where they can reap the financial rewards.
This is perhaps also illustrated by the fact that the average first-time buyer in 2021 is aged 33 – a statistic that hasn’t significantly changed during the last decade – however, in 1961, the average age of a first-time buyer was just 23.
There are fewer young homeowners now than there were a decade ago with just 38% of 25-34 year olds owning homes today compared to 55% percent ten years ago. So, will the after-effects of a COVID recovering economy contribute to the continuing decline in homeownership among young people?
COVID has had an impact on every aspect of young peoples’ lives, and the affordability of housing is no exception. With house prices increasing and young people losing their jobs at a higher rate than any other age demographic, their ability to get on the property ladder is becoming more difficult, and here’s why:
Stamp Duty:
Back in 2017, the government announced that first-time buyers wouldn’t have to pay Stamp Duty Land Tax on any property under £500,000. At the time, this provided a huge boost to young first-time buyers and even caused a short-term dip in the average age of first-time buyers.
However, when COVID hit the UK, this relief was extended to everyone, not just first-time buyers. It was said to be something that would help everyone afford new housing, but young first-time buyers didn’t benefit as they already had this tax relief. Instead, it created a surge in house prices due to existing homeowners seeking to take advantage of this new tax benefit.
More young people are losing their jobs:
On top of the stamp duty no longer helping young people afford homes, they have also been losing their jobs at a higher rate than their older peers. More under-25s have lost their jobs during the pandemic than any other age demographic, and once the UK’s furlough scheme ends in September, unemployment figures among young people are likely to get a lot worse.
It goes without saying that it is simply impossible for any young person, who would be reliant upon a mortgage, to buy a property when they’re unemployed. COVID induced unemployment among younger people is bound to have a scarring effect on their income and employment prospects in the years to come, thus extending the doubt in their ability to buy a home for the foreseeable future.
Increasing debt:
On top of the devastating employment prospects faced by young people, they are also more likely to be in debt to their landlords. Rental properties are primarily inhabited by the younger generation and, as with the stamp duty relief, the mortgage holidays scheme has been of no use to them. Instead of introducing an equivalent rental holiday, the UK government imposed an eviction ban.
Presently, this eviction ban has been extended until March 2022, but in the meantime, renters are getting into more and more debt with their landlords.
A study published back in January found that 46 per cent of renters have lost income during the pandemic, and 15 per cent are now in rent arrears. The number of private renters behind on their rent has also doubled since February 2020. Being in debt to your landlord is hardly conducive to buying a property and will only make it more difficult for young people to get on the property ladder.
How long these difficulties will continue for beyond the pandemic remains to be seen. However, the prospect of increased unemployment once the furlough scheme ends, and the debt many will have to pay back to their landlords in next year, the existence of young first-time buyers definitely seems under threat.
But is a decline in young homeowners such a bad thing?
A survey conducted in the US earlier this year found that two thirds of young homeowners had buyer regrets.
By far the biggest regret was not being prepared for maintenance and other costs associated with homeownership. 26% of homeowners aged 25-31 said they thought that the costs of homeownership were too high.
They were also most likely to say that they didn’t get a good mortgage rate, or that they overpaid for property. For example, 12% said their rates were too high, and 13% said they agreed to a sale price that was more than it should have been.
Although mortgage rates are near historic lows, it’s still important to shop around for the best offer. Even a few percentage points difference in interest can mean a saving (or extra cost) of thousands of pounds over the life of a loan.
Millennials were also most likely to be unhappy with their new home’s physical characteristics. According to the survey, 15% of respondents from that generation said they disliked their new property’s location. About 30% thought that the home was not the right size.
It’s relatively safe to assume from the above survey results that the principal factor driving the dissatisfaction of young homeowners in the US is a lack of experience in the housing market and a lack of maturity in decision-making due to their age – maybe this should be a cautionary tale for wanabee young homeowners in the UK.
