The Social Challange
The decline in homeownership between 2005-2020 means 1.4 million more homes are being rented instead of owned and homeownership aspirations are not being met. Excluding those over the age of 65 years old, homeownership levels have reduced from 72.7% in 2004 to the current level of 57.7%. Homeownership levels in England have increased among those over the age of 65 years old from 72% to 78%. In every other age bracket, homeowner levels have declined. (Source: MHCLG).
According to Housing Europe, 20 out of 27 other European countries now have a higher proportion of home ownership than the UK (source: cps.org.uk; Resentful Renters).
THE UK IS A NATION OF ASPIRATIONAL HOMEOWNERS
There is widespread consensus that the UK is suffering from an acute housing problem with a market that is fundamentally broken.
The large majority of People prefer home ownership over renting. The Building Society Association (BSA) survey in June 2018 found three-quarters (75%) of people aged 25-34 aspire to own their own home, with less than 3 in 10 (28%) currently doing so.
Of the 48% who currently do not own a home, only half (53%) were ever likely to. Given the situation has potentially worsened since the survey, these numbers may be conservative (see Figure 1 & Figure 2).
The social challenge regarding many people’s ability to acquire a UK property is clearly evidenced above. The challenge continues to worsen, despite government support through reduced stamp duty, Help to Buy, and other measures to slow the growth in the private buy to let market. There are a number of reasons for this. These include a shortage of affordable housing, planning restrictions and affordability. A key area cited is the ability to raise the required deposit. This remains a significant barrier to realising the dream of home ownership.
Why does the challenge exist?
Access to mortgage lending
Since the 2008 global financial crisis, changes to the mortgage market have rationed the availability of first time buyer mortgages.
With the recent low interest rate environment, we now find first time buyers’ mortgage payments as a percentage of income have declined dramatically (see Figure 4). Obtaining a mortgage, however, is a lot more challenging.
Tighter financial regulation has resulted in mortgage qualification being harder and deposits higher. Basel banking rules require higher capital allocation for high LTV loans. Regulatory changes imposed by the Bank of England Financial Policy Committee discourage banks offering mortgages with greater than 4.5 times income multiples.
Analysis of the new affordability stress tests showed that 2.8m first time buyers’ households could afford a particular mortgage payment, but only 974,000 would qualify for this. Over time, this dynamic has created 3.57million ‘Resentful Renters’ – people who would’ve been homeowners before the financial crisis, but now are not” (Source: cps.org.uk Resentful Renters).
The evolution of the private rental sector
The traditional Buy to Let (BTL) sector has experienced major change in recent years, with its primary goal seeking to address tenant and landlord inequality with the introduction of changes to stamp duty levels, reduction in tax benefits on interest and the Tenant Fees Act. The result has seen the following trends within PRS:
New BTL mortgages have declined by 32% in two years (Source: Savills Research, English Housing Survey).
Landlords are passing on increased costs to renters through annual rent increases (Source: ARLA).
Demand for rentals is at an all time high though supply is rapidly decreasing as more landlords sell properties
A move to short term lettings (i.e. Airbnb) is occurring with many renters facing eviction as a result
Saving for a deposit
Home ownership for many remains a distant dream. The only way to guarantee this is to raise the required deposit whilst potentially servicing rental payments. Research suggests the average time for a couple to save for a 15% deposit is 4 years 9 months and a single person 10 years and 3 months (Source: Hamptons International).
Additionally, the amount required has grown significantly with the median LTV for first time buyers below 85%. (Source: Council for Mortgage Lenders/UK Finance)