Thousands of youngsters are locked out of the property market. Is there a solution? Is anyone going to step in to save the day? Why are younger people struggling to buy property? Payday Loans Net is a new UK lender looking to help UK consumers learn more about saving and managing money.
In this article you will learn:
- A short history of the Property Market
- How is the property market changing lifestyles?
- Why are younger people struggling to buy property?
- Government Help for Young Buyers
A short history of the Property Market
Until the mid-1980s it was common for first-time property buyers to get on the property ladder fairly easily in their twenties. While property was seen as a north investment, with solid increases in value in the years after World War II, there hadn’t been any property booms putting house purchase beyond modest means. It was quite reasonable for competitive mortgages to be offered by the many banks and building societies at a multiple of three times earnings, with a deposit of 5-10% of the purchase price being paid in cash. There was lots of competition from lenders – there were much more mutual building societies around in those days, whose main raison d’etre being the provision of mortgages for personal house purchase. Online loans rules have since changed.
In most towns and cities, a modest starter home or flat could be bought for three times income plus deposit. Some direct lenders allowed a 50% proportion of the “second earner” salary in a couple to be added to the maximum lent. (These were pre-equality days, the majority of applicants were married couples, so the expression “three time main income plus half the wife’s salary did not raise any eyebrows).
To put these lending criteria into perspective, today’s average salary in the UK based on 2016 average weekly earnings of £539 is approximately £28,000 per annum – about £30,000 for man, £25,000 for women. Based on the common criteria used from the 1960s to the early 1980s three times £30,000 plus half of £25,000 would permit a maximum mortgage of £102,500. Add to that a saved deposit of 5% would enable you to buy a property for about £105,000. Apart from a few depressed and derelict areas, you cannot buy a reasonable home for this price.
The average UK house price in 2017
According to the UK Land Registry House Price Index for February 2017 the average house price in the UK was £217,502 – more than DOUBLE what a traditional mortgage calculation the parents of today’s youngsters would have needed to fund. (See the Land Registry website, link below, for latest house price information). These average prices do not show the whole picture. The average house price in London in February 2017 was £474,000. While the February 2017 average home price in the north East of England (one of the lowest cost areas) was only approaching £124,000 it is still beyond the 3x earning plus half a second salary ratio. Take into account the regional difference in wages, nearly £34,000 average per annum in London compared to £26,000 or less per year in the following regions: North West, Yorkshire and the Humber, North East, Wales and East Midlands – in reducing order.
How is the property market changing lifestyles?
The inflated property market, inflated when compared to when it historically compares to wage levels has substantially changed the lifestyles of many in the younger generations. The lack of affordable homes to buy is not the only problem affecting the young. Since the mass sell-off of social housing, council homes, which started in the 1980s there has been a loss of affordable homes to rent. Throughout the 1990s and early 21st century, there was a rapid expansion of private buy-to-let landlords. This, along with a lack of new-build housing, for purchase and for rent, has made private renting unaffordable for many younger people.
This has led to two significant changes to the lifestyles of individuals affected. Firstly, many younger people struggling are staying at home with “mum and dad” for much longer than they used to. The parents and grandparents of today’s younger generations would have seen moving out from the parental home as quickly as possible as an ambition. This was the case whether they were single or settling down with a partner and maybe getting married. This change will have repercussions on society for years to come. People are settling down much later in life. Many remain childless or start a family much later due to financial pressures. These effects are a ticking time-bomb for society.
Leaving the parental home
There is another major effect of the change in the housing market. That is for those who have to move out from their parental home, whether it be for personal or work reasons. For these young people, the high rent in the private sector will affect them. With a larger proportion of their income going on rental housing costs, there is less money left over to save towards the purchase of a home. This has been made even more challenging after the financial crash of 2008. After governments had to take steps to rescue the fragile banking sector, they introduced new, stricter lending regulations. This is another reason why there is an increase of younger people struggling to buy a property.
This brought about new conservative lending policies from banks and building societies. They started demanding much bigger deposits. Contrary to previous years, where 0% or 5% deals had been common, now they were asking for 20%. They did this to protect against mortgage defaults, or the possibility of negative equity if house prices dropped. While the worst fears of a property crash have not come to fruition, in most areas, the effect on young savers has been just as bad. House prices have far outstripped wage rises in the nine years since the financial crisis. This has only made property purchase ever more challenging or unaffordable than what it used to be.
Government Help for Young Buyers
As such, George Osborne initiated a new scheme to help first-time buyers move out of home. In 2017, the government promised to top up savings of any person looking to buy a home. For every £200 saved, the government promised to add £50! This worked out that if someone deposited £12,000, the government would help with the remaining £3,000. £15,000 should be enough for a down payment on most properties in the UK. Will this help younger people struggling to buy property? We can only wait and see.