WE can’t get a mortgage and we’re struggling to pay record-high rents. SO CAN YOUNG PEOPLE ever GET AN AFFORDABLE ROOF OVER THEIR HEADS?
If there ever was a classic “Catch 22” scenario, it is the one facing “Generation Rent”.
Young people are struggling to generate decent deposits to get a mortgage approved. This leaves them with no option but to rent or move back home. But this has never been so costly – rents have risen to an all-time high and more parents have begun charging a monthly price for home comforts. If young people can just about cover the cost of bills and keeping their landlord or mum and dad happy every month, what will be left to put into a deposit, the all-important pot of cash needed to get out of this scenario?
Like I said, Joseph Heller would be proud. Or not, considering a whole generation is at the mercy of landlords and deprived of the opportunity to own a home.
A widely-publicised Halifax survey last week revealed that 77% of non-homeowners aspire to buying a house in this country.
But nearly half of 20-45 year olds say Britain is becoming more like Europe where renting is seen as the norm, and predict Britain will become a nation of renters within the next generation. Almost two thirds of non-homeowners believe they have no prospect whatsoever of buying a home, with only 5% of this group making sacrifices to save for a deposit, and 95% saying they have no spare cash, no interest in saving for a deposit, or they are trying to save but failing to do so.
To add insult to injury, a survey published tomorrow says rents are still going up!
But some – such as Ed Smith in the Times recently – believe property ownership is overrated in this country. For starters, paying back a mortgage – or even just interest – is as onerous a commitment as renting. Moreover, young homeowners have the disadvantage of being tied down to one place, just at the time when you want the freedom to up sticks without the expenses of selling and moving. Renting, Mr Smith argues, allows you to be footloose and fancy-free.
All fair and well. But young people are paying a high price for this privilege. The Daily Telegraph recently reported that average rent a month is £692. If you take the average weekly earnings in the UK at the moment, which amounts to roughly £1928 a month, you will hand over around 35% to your landlord. Even if you take into account the rent split between two occupiers, Easyroomate.com reckons the average flat-sharing rent is £399 this year, which is still around 20% of the average monthly pay packet.
There are areas in the UK where rent is significantly higher, such as in London and the South East, and so the figures are far more affordable up north. But wherever you are, you agree to pay rent for a period of time the landlord assigns (normally a year) before you either negotiate another tenure or move on elsewhere. You must also ensure you have a steady job on at least average wages to fund that occupancy. So much for kicking up your heels.
Then there is the continental argument, that prosperous and functional countries have a higher proportion of renters than homeowners. But take Germany: tenures tend to be stable, rent prices are tightly controlled, rental properties are good quality, taxation doesn’t really favour home ownership, and mortgage requirements have always been stringent.
My 25 year old brother travels a lot thanks to his work and many of his German friends tell him rent is veritably cheap, even in a capital like Berlin.
Moreover, even in those areas where renting is just as expensive as here, you have to look at the big picture to understand the potentially huge difference in what foreign youngsters can afford to pay.
Germans studying in their own country don’t have the same levels of college debt to service, and inflation has not risen as quickly as here. Germany also has the lowest youth-to-adult unemployment ratio in Europe, thanks in part to an apprenticeship programme offered by 24% of firms.
In this country, everybody is feeling the pinch, but young people are being given the economic equivalent of a Chinese burn. Student debt is an increasing burden, utilities and bills are getting more expensive, and those who have jobs are on a static wage packet, with their pay unable to keep up with ever-rising costs.
Easyroommate.com reports a doubling of the proportion of flat-hunters prepared to share with others rather than “setting up a love-nest”. It says: “For many, the idea of sharing an intimate flat with their partner has had to be placed on the backburner, and sharing with flatmates has become a financial necessity.” According to moneysupermarket.com, the average age at which aspiring property owners expect to be able to afford their own place is 38, or in London an elderly 43.
There are plenty of people who can’t even think about a deposit once they’ve paid all the monkeys off their backs. The average amount needed to get a mortgage approved is 21% of the property’s value, up from 5-10% that was the norm before the financial crisis. Back in the boom days, loan to value (or LTV) mortgage rates could reach a whopping 125% – that meant you could be given a loan that represented the whole value of the property plus 25% on top!
In retrospect, it is not surprising that many buyers defaulted on these colossal loans they could never afford, echoing the catastrophic housing collapse in America that precipitated our global recession.
Now, the party is over and it is we who are suffering the hangover. We quite possibly have to put down between £28,000 – £33,000 in deposit money if we want to purchase the average UK property, which was priced at £160, 395 in April.
There is also a lot of debate about where property values will go over the next few years. Even the most optimistic say growth will be modest, and homes will not yield fantastic capital gains like they did between 1997 and 2007. Others, like Sean O’Grady the Independent’s economics editor, predict a “gentle reverse”.
But a survey published tomorrow by the Royal Institution of Chartered Surveyors predicts the squeeze on renters tightening even further. It says: “Although we are beginning to see more mortgages aimed at first-time buyers, many potential homeowners are still restricted from getting a foot on the property ladder, leading to increased demand in an already oversubscribed rental market. There has been a small uplift in supply, but the imbalance between demand and availability can only mean rents will continue to rise.”
There is a silver lining for the many would-be buyers. At least if you get a higher deposit together now you have lower interest rates to pay on your loan over time. And one day, the mortgage will get paid off, as long as your income is steady. Compare this to the never-ending handover of hard-earned cash to an anonymous landlord.
And if house prices are actually slightly suppressed at the moment – I know, hard to believe, but they haven’t actually been this low since the summer of 2009 – this could change soon in hotter property spots, with some forecasts projecting a 16% increase by the time 2016 rolls around. (Not good news for future first-time buyers, but it means a real rise in value for anyone who can scrape together the cash to make it happen sooner rather than later).
But perhaps there is some good news for those reluctant renters.
Halifax admits “there is no rush to buy as the housing market looks set to remain subdued for the foreseeable future….therefore aspiring homeowners can take their time to save that all important deposit without the fear that house prices are going to soar out of reach”.
Coming from someone with recent experience of renting, living at home, and sharing a mortgage with family support, my tips this week will be of scant consolation to many, but they are well meant and will work for some.
Live at home if you can bear it
People sometimes move out in pursuit of short-term independence, thereby giving up any hope of achieving it long-term. When you are doing the sums, add up all the costs of moving out – bills, council tax, transport, running your own car, insurance – as well as just the rent. If you are expected to pay a rent at home, could any part of it be stashed away by the parents for you and go towards your deposit?
If you do have access to Bank of Mum and Dad, investigate guarantor mortgages
You will still be the property owner and pay the mortgage, but your parents will underwrite the financial responsibility. If your earnings will take time to build, they may be willing to contribute a proportion of the monthly payment, which could decline over time until you take it on completely. If you are very lucky like me, you might also be able to take the mortgage on jointly with a sibling. An overwhelming majority (84%) of first time buyers now rely on financial support from their parents, according to Clydesdale and Yorkshire Banks. This figure has more than doubled since 2005, when just 38% of buyers relied on parental help. Lloyds TSB has a Lend a Hand scheme which offers a 95% mortgage at the market rate for a 75% loan, as long as a guarantor puts up 20% in the form of savings on which the bank pays 4% for three years . The scheme has now been extended to a partnership with local authorities, for those who cannot raise the 20% from a family member.
If you can save, according to Santander it takes the average saver 30 months to raise a deposit – that’s not forever
In the last decade, the bank says, 43% of first home owners counted the pennies and used their savings to get onto the property ladder. A further 14% relied on inheritance or money gifted from parents, while 5% took on additional work. Scan the market for the best savings options and be ready to move your cash around.
Don’t be a loner
Sharing a flat with others is 38% cheaper than going it alone, says easyroommate.com, while couples who can bear to rent a joint room could raise the average property deposit in eight years just from the savings on renting a room rather than an entire flat.
Beware of new-build schemes
Shared equity offers from developers selling new-build flats should probably be treated with caution, as so many people have had their fingers burned buying similar properties. But you could investigate shared ownership with a housing association. The association takes ownership of between 25% and 75% of the property. The higher the buyer’s share, the lower the rent, and eventually the buyer can own it outright. Leeds building society for instance has a new shared ownership mortgage, offering up to 75% loan to value overall, but up to 95% of the borrower’s share.