How long will it take ‘Generation Rent’ to get on the housing ladder?
August 10, 2016
Our recent UK Economic Outlook report explored how housing affordability has and will change over time, and looks at what Brexit will mean for housing and the wider economy in the short and medium-term. But while it is generally agreed that getting on the housing ladder has become harder in recent years, what does this actually mean?
We estimated that young renters with no parental help who start to save for a deposit in 2016 may have to wait 18 years until they have the £115,000 average deposit that will be required to buy their first home (in 2034). This group has thus been dubbed ‘Generation Rent,’ as the proportion of them privately renting has more than doubled from 20% to 50% since the millennium.
Housing is more expensive than it has ever been. House prices have doubled since 2002, with the average house now costing £277,000 (and over £450,000 in London). Over the same period as house prices have doubled, average incomes increased by just 27%, creating a significant affordability challenge. Looking ahead, the UK’s vote to leave the EU has helped housing affordability somewhat, as we estimate the average UK house price will be £17,000 lower by 2018 than would have been the case without Brexit.
Nowadays, though, house prices are only part of the story. As well as needing sufficient income to be able to afford a mortgage, potential buyers now need increasingly large proportions of the price in cash to provide as a deposit. A typical first time-buyer needs will have a 20-25% deposit today, compared with an average of only 13% throughout the 1990s. Combined with rising prices, we think it now takes renters three times longer to save for a deposit than it did at the turn of the millennium, and six times longer than in 1990. However, with interest rates at a record low, mortgage repayments can be more affordable once you’re on the housing ladder.
Parents (and grandparents) to the rescue
As home ownership has become more difficult for many young people, a new lender has emerged to help fill the affordability gap: the “Bank of Mum and Dad.” In 2016, family members will support 25% of all mortgage transactions, giving a total of £5bn (as a gift or interest-free loan). ‘Generation renters’ who get this type of financial support benefit significantly, as mortgage payments are typically cheaper than the rent that they would otherwise be paying, allowing them to save more.
Businesses are starting to pick up on this too. A handful of high-street banks are now offering schemes that provide mortgages to young people without a deposit, if somebody keeps a certain amount of money (typically similar to a deposit value) in the account for a specified number of years. Schemes that facilitate lending without loved ones having to actually hand over the cash are a step towards broadening access to home ownership.
But what if my family can’t help?
For people without family wealth who are unable to take advantage of guarantor schemes, the answer may be in saving more. According to our survey, 20-39 year olds are currently saving about 9% of their income. Our research indicates that if savings could be increased from 9% to 15% of income, the number of years of saving for a deposit would halve from 18 years to 9.
The government has recently introduced Help to Buy ISAs through which they will match 25% savings for a deposit, up to a maximum contribution of £3000. While these are good initiatives that recognise the problem, perhaps more could be done to encourage individuals to save in general. Insights from behavioural economics including commitment devices, the use of default and loss aversion could be adopted. For example, consumer bank accounts in the USA are typically segmented into checking and savings accounts. Schemes such as “Keep the Change” (if you buy something for $2.90, your checking account will be charged $3.00 and 10 cents will be moved into the savings account) facilitate savings without consumers having to actively think about their longer-term savings goal throughout their hectic day-to-day lives.
While broadening lending channels and saving more will improve the situation for some people, they won’t solve the true underlying issue – that housebuilding in the UK has been insufficient to keep up with demand, leading to the long-term affordability challenges which our research highlights.
Action is needed to encourage homebuilding. This could eventually lead to a situation where earnings growth again outstrips house price growth, improving first-time buyer affordability. But such a shift is likely to be a long-term process. In the meantime, more can be done to improve the landscape of renting, such as increasing the quality and security of rented accommodation so it becomes a more attractive option.
 We conducted a survey of 2000 adults in the UK. Those aged 18-34 renting from a private landlord saved an average of 9% of their income.