Millennials are struggling to follow in their parents’ home ownership footsteps, according to new research from the Resolution Foundation.
It found a third of millennials – people born between 1980 and 1996 – could live in rented accommodation their entire lives and 40% were still living in rented accommodation aged 30, double the rate of “Generation X”, born between 1965 and 1980.
The collapse in home ownership isn’t confined to London. Ownership among 25- to 34-year-olds fell in Greater Manchester from 53% in 1984 to 26% last year, from 54% to 25% in South Yorkshire, from 45% to 20% in the West Midlands, from 50% to 28% in Wales and from 55% to 27% in the south east.
Separate research from TopCashback found buying a home is only the fifth highest financial priority for millennials. It found that 95% want to buy a home in the future – but 31% don’t think they will, 29% are only hopeful about their chances and just 39% are sure they will buy a property.
The obvious answer is that the increase in house prices has outpaced the rise in incomes, particularly over the last 20 years.
When England won the football World Cup in 1966, the average property cost £3,840, but now it’s 60 times higher at £226,906, according to the Office for National Statistics.
By comparison, the average annual pay for men in 1966 was £1,220 – so a house cost just over three times your annual salary. Today, the average full-time salary in the UK is just under £27,000 per year – so a home in England and Wales costs 7.8 times your annual salary.
Mortgage lenders will usually offer you around 4.5 times your salary or three times a couple’s joint income, so in many parts of the UK that’s not enough to buy a property unless you’ve saved a large deposit or get help from the bank of mum and dad.
Buying a home has become progressively harder since the early 1990s when interest rates of more than 10% caused some homeowners to suffer negative equity, and led to a fall in house prices.
Since then, apart from a brief blip following the 2008 financial crisis, UK house prices have been rising faster than earnings making home ownership a more difficult ambition to attain than for Generation X.
Millennials have watched those slightly older than themselves struggle to save for a deposit, often finding this goal remains out of reach as house prices continue to rise, pushing up the required deposit to unattainable levels.
So, have we reached a tipping point where millennials are giving up on owning their own home?
Recent data suggests so.
The latest English Housing Survey, published in January 2018, showed that the average deposit for a mortgage is now £48,591 and the average age of a first-time buyer has risen to 33.
The TopCashback research suggests that health, financial freedom and being financially stable are bigger motivational factors for millennials than becoming a homeowner.
The problem appears to be in getting a mortgage, not affordability once you have one.
Zoopla found that London is the only UK city where renting a two-bedroom flat is cheaper than buying one.
This is partly due to supply and demand. Lack of available rental property keeps prices high – but since 2008, when the Bank of England cut interest rates to 0.50%, low monthly mortgage payments (if you can get one!) has made it lucrative to rent out properties.
Of course, interest rates will rise at some point, with financial implications for homeowners and renting may become cheaper again.
But currently if millennials can get on the property ladder, it could be cheaper than renting and benefit them in other ways too.
Clearing your mortgage means you don’t have a monthly payment to make, leaving more money for other things. Overall, paying a mortgage for 25 years costs less than renting for 50 years.
Also, property value usually increases over time so you get back more than you paid for it and potentially have an asset to leave your family.
Home ownership gives an emotional as well as financial stake in the property and means you’re motivated to invest in it to make the property a home for your family’s changing needs.
However, there is an increasingly common scenario that supports the view of some millennials that are foregoing property ownership: you could spend 15 years saving for a deposit and a further 25 years paying the mortgage, only to then sell the property to pay for care costs.
Expenses relating to maintenance, structural problems, property defects or accidents are the owner’s responsibility, though insurance mitigates this disadvantage. With renting, liability is limited.
When you own a property, you could suffer from negative equity. This is when the value of the property falls and you owe more than you paid for it.
So, if you decide against home ownership, what are the options?
Renting offers more flexibility because of short leases; if your job involves moving about this can be a better option.
However, one big downside of renting is that you won’t be building any equity: the money you pay in rent is gone forever – and it’s hard to save for a deposit to buy a property when renting, especially if you live in an expensive area.
If you have the option of living in a family home for a few more years, that can make it easier to save up for a deposit.
The government recently abolished stamp duty for first-time buyers on the first £300,000 of properties valued up to £500,000. There are also some government-backed schemes and other novel options for getting onto the property ladder:
You pay a deposit of 5% and the government lends you up to 20% (or 40% in London) to get a mortgage to cover the rest. The government loan is interest-free for the first five years. Because you approach the mortgage lender with a much larger deposit, you will be offered a much lower interest rate.
A individual savings account (ISA) that pays a 25% bonus from the government when used to buy your first home.
Research from Moneyfacts shows in March 2018, there were over 300 mortgages available with a 5% deposit (a loan-to-value (LTV) ratio of 95%), the highest number since April 2008. However, the interest rate tends to be higher for these products.
This also offers a 25% government bonus and is open to 18-40-year-olds. You save but can’t access your savings or the bonus until you’ve had the account for a year.
You buy a share of a property, usually 25% to 75%, through a housing association and pay rent on the rest. You have the option of increasing your share of the property in the future.
This is a potentially risky option, but works well for some. You must consider legal issues and what happens if one person wants to move or sell up. Consider setting up a ‘deed of trust’ to show how much each member has contributed and outlining what happens if one member wants to sell. All members are jointly liable so if one member doesn’t pay their share of the mortgage, you’ll still need to cover their costs. Read our full guide on managing your finances when moving in together.
According to M&S Bank, more than half of millennials are considering buying a home with friends or family.
If your parents are able and willing, they can help with money for a deposit, or act as a guarantor on a 100% LTV mortgage. Once you have a property, paying for it may be cheaper than renting.
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Last updated: 21 June, 2018
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