For many young people, the thought of ever owning a home seems like a distant dream.
According to the Institute for Fiscal Studies, since 1997, the average property price in England has risen by 173%, so it’s not surprising that many people on low or middle incomes are struggling to scrape a deposit or buy their first property.
This article investigates the barriers that young people face when trying to join the housing market. We’ll be discussing:
- It is harder to save a deposit?
- Are low interest rates on savings accounts to blame?
- Is renting leaving young people trapped?
- Are deposits too high?
- Are mortgage payments higher now?
- Is it harder to get onto the property ladder now?
- Is there a solution?
Is it harder to save a deposit these days?
For many young adults in the past, saving a 10% deposit was manageable within 6 months.
In fact, in 1996, only (33%) of young adults needed to save their salary for longer than 6 months in order to buy their first home. In 2016, 78% of adults aged between 25 – 34 needed longer than 6 months to save a 10% deposit.
Shockingly, data collected by the BBC shows that many potential first-time buyers must typically save for eight years to afford a deposit to buy a home.
So why is it harder for younger adults to save a deposit in today’s economy?
Are low interest rates on savings accounts to blame?
In 2006, it was pretty easy to find a savings account that offered a 4% annual return on deposits and a handful of banks were even offering introductory rates as high as 6%.
Today, you’re extremely hard-pressed to find a savings account that offers better than 1.5%. Some banks offer higher rates, but they’re tied to specific savings requirements, minimum balances, usage requirements, and other factors.
According to The Guardian, one of the Bank of England’s leading policymakers forecasts that the era of low interest rates will last for at least another 20 years.
So, is it any wonder that young people aren’t depositing money into so called ‘savings’ accounts?
People are saving less
- The Office for National Statistics (ONS) reported that the amount households save out of their income fell to just 1.7% in the first quarter of 2017, the lowest rate recorded.
- Personal deposits grew by just 2.3% in July 2017, which is the lowest growth rate for eight years. Individual Savings Accounts (Isas) also saw a big annual decline.
With little to gain, perhaps the thought of putting money into an account where little interest will be earned, leaves them feeling that ever having enough cash to own a home is impossible.
Is renting leaving young people trapped?
According to the Independent, the average age of someone in the UK buying their first home in the ‘60s was 23.
Fast forward to 2018 and the average age of someone in the UK buying their first home is 30 years old. This means that there is a large group of younger people who are either still living at home or are paying high rental fees in order to live alone.
With many unable to save a deposit whilst also paying rent, they remain locked in a system of renting. In fact, according to a report by The Telegraph, privately renting households have doubled between 2001 and today from 2.3 million to over 5 million.
Research by Knight Frank found that 68% of renters expect to be in the same position in three years’ time because of financial reasons.
How much is the average rent?
The demand of rental properties has increased and so has the amount of rent people are charged.
A one bedroom flat in a major city averages at £650 whilst the same flat outside of the city would cost £550 a month.
After paying rent as well as utility bills and other living costs such as car insurance or commuting expenses, many young people simply aren’t left with enough money to save for a deposit.
Are deposits too high?
The deposit size required to secure a property varies across the country and unsurprisingly, properties in London have the highest average deposit size of £80,000.
Many lenders suggest to first time buyers that they save a larger deposit of 20% in order to access more competitive interest rates and to pass the lender criteria.
This leaves many left saving for years in the hope that they will eventually be able to pass affordability checks and purchase a property.
What is the average deposit size across the UK?
Research from Which shows the large deposit amounts needed on average in various locations across the UK.
- Southampton – £33,118 (16%)
- Cornwall – £34,799 (20%)
- York – £39,252 (20%)
- County Durham – £16,485 (16%)
- Carmarthenshire – £17,486 (15%)
- Fife – £20,252 (17%)
- Leeds – £28,831 (18%)
- Bedford – £39,483 (17%)
Many are still unable to buy a home
According to the BBC, even with a deposit, 40% of young adults cannot afford to buy one of the cheapest homes in their area.
Most mortgage lenders today will lend 4 times an applicant’s salary (although some go higher). So for someone earning £20,000, they could borrow £80,000. With the average property price in the UK being £234,850, this leaves many unable to buy.
As well as this, affordability checks with some lenders have become very strict, meaning that borrowers who may have previously been accepted for a mortgage, find themselves declined because of a lack of credit history or self employment.
Are mortgage payments higher now?
The debate between younger and older generations regarding ‘who had it worse’ when trying to buy a house is one that continues.
But despite the increase in property prices, is it really harder for younger people to get on to the property ladder then it was for their parents?
To understand this, we need to compare the average salary vs the average cost of a home 30 years ago and now.
In 1988 the average cost of a home was £50,000
A typical interest rate for a mortgage back then would have been ten percent, so for homeowners with a mortgage of £50,000, this would have costed them £5,000 a year.
The average UK salary in 1988 was £13,066
That would mean that a single person buying a home alone, would need to spend 38.2% of their annual income to pay their mortgage.
In 2018 the average cost of a home was £234,850.
Today, there are some lenders who offer two year fixed-rate mortgages at 1.5 per cent. This would cost the homeowner £3,522 a year.
After the two year fixed period end, the rate of interest increases to the standard rate of four per cent. This would equate to annual repayments of £9394.
The average UK annual salary or monthly wage of full-time employees, according to the Annual Survey of Hours and Earnings (ASHE), is £27,600.
That would mean that a single person buying a home alone, would need to spend 34% of their annual income to pay their mortgage.
Is it harder to get onto the property ladder now?
So which generation had it easier, Generation X or the millennials?
It would seem that when looking at the proportion of income needed to pay a mortgage was in fact higher in 1988 than it is now. That being said, it could be argued that it is a lot harder for younger people to save their deposit then it was for previous generations.
With higher rental fees, less lenient lenders and larger deposits required to secure a mortgage, it could take a lot longer for those currently aged between 25 and 34 to get onto the property ladder.
Is there a solution?
To tackle the housing crisis and help more younger buyers onto the property market, governments both previous and current have introduced schemes and incentives to make it easier.
There have included:
- Stamp duty relief for first time buyers
- Shared Ownership
- Help to Buy – Equity Loans
- Help to Buy – ISAS
Of course, there are lenders who are more lenient and may not require a larger deposit or charge rates of interest that are as high.
It can be really helpful to chat to a mortgage advisor who will have a better understanding of the property market in your area and will be able to find you the most affordable route to home ownership for you based on your circumstances.
For more advice on how to get onto the property market or to talk to a broker, contact OMA. We can put you in touch with someone who is best suited to your situation and will be able to give you the best advice.
(Correct at time of writing 06/02/19)
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