Young People Can’t Afford Homes, Even With a Deposit


October 2018

Young People Can’t Afford Homes, Even With a Deposit

According to new research by the Institute of Fiscal Studies (IFS), roughly 40% of young adults can’t afford the cheapest home in their local area even with a 10% deposit.

The research shows that house prices have grown by 173% over 20 years in England and 253% in London, after adjusting for inflation.

However, average pay for 25 to 34 year-olds has grown by only 19% over the same time period. Moreover, the average cost of renting property has increased by 38%.

For most of England, house prices have not increased by much over the last decade; however, there has been a 30% increase in London, 8% in the South East and 10% in the East of England since 2007.

House price growth has largely benefited the older generations (as homeowners) at the expense of younger ones, causing greater intergenerational inequality.

House price growth consistently outpacing wage growth has made life difficult for younger people trying to buy their first property. The proportion of young adults who need more than six months’ salary to pay for a 10% deposit for the median property in their area has increased from 33% to 78% over the past two decades.

The majority of this change took place between 1996 to 2006, where the last decade has seen stable and falling house prices meaning raising a deposit has been comparatively easier in most of the UK apart from London, the South East and East of England – although sluggish wage growth largely means that the problem is simply not getting worse, rather than actually getting better.

In 1996, 93% of people with a deposit and a mortgage worth four and a half times their salary could purchase a home. This figure decreased to 61% in 2016.

The IFS have shown said that the lower “purchasing power of young adults’ income” is partly caused by higher rental costs, which have increased from £140 a week to £200 in England. This has made it harder to save for a deposit.

A 27 year-old recruitment worker from Ling’s Langley in Hertfordshire told the BBC that he and his partner have moved to a shared house from a rented flat in order to save money. The recruitment worker has estimated that it will take him at least a decade to buy a house.

“On a current trajectory, the cheapest deposit is £15,000 to £20,000, so you’re looking at 10 years plus”, he told the BBC.

“For young people, it seems an almost impossible challenge. It’s a depressing outlook.”

The think tank Onward have recommended that the government should establish rewards or monetary incentives to landlords who sell to long-term tenants, giving UK private renters a chance to buy a home.

Onward have said that buy-to-let properties should be eligible for 100% capital gains tax if the property is sold to a long-term tenant who has lived in the property for three or more years.

The think tank estimates that the average gain per property would be £15,000 to £7,500 for both the landlord and tenant, a move which would help tenants apply for a mortgage.

Lower taxation has been welcomed by the Residential Landlords Association (RLA) but cautioned a tax relief on landlords selling properties to long-term tenants and instead suggested a tax relief on rent or a refund on Stamp Duty.

Onward estimate that 88,000 households would qualify for the tax relief each year, which would cost the Treasury around £1.32 billion a year.

However, the IFS have warned that policies which advantage young buyers over multiple-property owners could risk increasing house prices or rents or both.

The IFS’s new research also shows that the proportion of 25 to 35 year-olds that own a house has dropped from 55% twenty years ago to 35%.

However, homeownership among the older cohort of 65 to 74 years old has risen gradually to around 80%.

IFS research economist and co-author of the study, Polly Simpson, said: "Many young adults cannot borrow enough to buy a cheap home in their area, let alone an average-priced one. These trends have increased inequality between older and younger generations."

The study said that the best method for tackling the problem is for the government to increase the supply of homes.

It critised planning restrictions, such as those in place within Green Belts, for impededing the construction of new homes in response to increases in demand.

"Without increasing supply, policies to help young adults get onto the housing ladder will continue to push up house prices - and potentially rents too, which would hurt those young adults who will never be able to buy their own home," the report said.

1.1 million homes have been built since 2010, said a spokesperson from the Ministry of Housing, Communities and Local Government.

“This government is committed to helping more people get on the housing ladder and last year saw the highest number of first time buyers for over a decade."