Housing for the Younger Generation: Locked Out and No Way Back?

Liz Emerson lays out the causes of the current housing squeeze, why this matters profoundly to society at large, and what should be done about it.

 “A factor is quietly at work that has the potential to profoundly shape the longer-term nature of home-ownership and mortgage lending in the UK. Housing wealth is slowly but surely becoming more concentrated in the hands of older households, and the number of older households with housing wealth is growing fast.” The Council of Mortgage Lenders.

This article explains why the phenomenon of housing wealth creeping up the age divide is of major concern to UK society as a whole, and cuts across all politics.

In October 2011, IF rose to national prominence with research that revealed that the UK has 25 million unoccupied bedrooms in the UK. That’s in addition to the national bedroom standard of one spare room allocated for each person in a household. A media furore unfolded, as the subject was hotly debated around kitchen tables the length and breadth of the UK. It seemed everyone had an opinion – from Any Questions to Private Eye.

IF had put its finger on one of many new fault lines opening up between the generations. No longer could traditional left/right politics deal with the phenomenon. Some academics refused to accept this fault line’s existence. Instead, they called it a “trope” used to disguise the real phenomenon of class politics between rich and poor. Not so: it is now an old rich and young poor phenomenon that is starting to have serious socio-economic effects across the generations and is starting to put intergenerational fairness at risk.

So why should housing be the frontline between the generations? For the simple reason that housing is the place where the pressures between the generations can be felt the most. IF figures reveal that 37% of the total English housing stock is under-occupied. Everyone wants one, no one wants to share one, not enough are being built to go round and everyone will hopefully be living longer in one.

In order to understand how the intergenerational schism has developed it’s important to follow housing over the last 70 years.

Your Home is Your Castle

The British love of housing really took off with Anthony Eden’s “property owning democracy” in the 1940s. Not for us the European model of renting. We’ll buy a flat or a house if we’re lucky. As the island’s population increased, so too did our housing aspirations.

Increase in Divorce and Single Occupancy

Increase in divorce and the growth of single-parent families post-WWII put additional pressure on housing. Separated couples needed bedrooms for their offspring. So instead of one house being occupied we now have two per previously married couple. But our hopes over the amount of space we required were growing too.

The Baby Boomers

The sense of self-entitlement of the baby-boomer (post-war population bulge) generation provided additional pressure on housing. Young people were leaving home earlier in life, striking out on their own and demanding independence.

At the same time, older generations who were traditionally meant to sit meekly in their children’s homes, to be looked after well into old age before they shuffled off to the local nursing home, were now seeking independence. They chose to remain in their own homes and public policy has supported their expectations ever since.

Thatcher’s Britain

Fast-forward to Thatcher’s Right-To-Buy scheme with the city bubble of the 1980s and unprecedented housing wealth grew in the UK. Suddenly the value of your house was the key discussion point at dinner parties around the country. New estate agents, new payment vehicles and interest-only mortgages started to appear on the market making a home of your own an aspiration that all classes could buy into. As demand grew, so too did prices. But what was not growing was the amount of new housing being built.

Downsizing US-Style

Over in the US downsizing is culturally deeply ingrained. Upping sticks and moving to the condo in warmer Floridian climes is not a stigma, and is expected. Back home, UK older generations are half as likely to downsize.

Why should this be a problem? As British families grew up and left home Mum and Dad chose to stay in the larger family house, hopeful for regular visits from children and grandchildren. And why would anyone move from their primary asset if they can see it appreciating before their eyes?

Equitable Life

Then along came the demise of Equitable Life. When it collapsed so too did the pensions of many hard-working middle-class professional members of society who saw their retirement futures destroyed overnight. With no faith in pensions as a retirement savings vehicle, the professional classes looked around and saw housing values rapidly increasing from the 1980s onwards. The logical conclusion was to put their savings into housing.

Housing as an Investment Choice

According to the National Housing and Planning Advice Unit housing equity was roughly equal to UK GDP in 1980, but by 2007 housing wealth was equivalent to 185% of GDP. Martin Weale, Bank of England Monetary Policy Committee member, and Director of the National Institute for Social and Economic Research, went further and said that if house prices had increased at the same level as the stock market over the last two decades they would be worth only half of what they are now. A housing bubble had been created through investing, improving and up-sizing to housing nirvana.

Buy-To-Let Boom

As pension-pessimist asset-rich home owners saw their properties double in price over 10 years, they realised that others were taking advantage of the rising market and got swept along by the buy-to-let market as an easy means towards building up their retirement income. Buy-to-letters owned so much equity in their homes they were seen as a“safe bet” by mortgage companies. It meant they could leapfrog first time buyers. Who can blame them? It’s worth noting that buy-to-letters also receive tax relief, further fuelling interest in the market.

Lack of Building

Alongside this housing boom was the decreasing number of new homes being built. The systematic lack of building in the UK over the last 50 years has been the subject of much debate. The Policy Exchange’s latest report Why Aren’t We Building Enough Attractive Houses provides a comprehensive overview of where we are now. What is clear from the report is that just 6-10% of England has been developed and only 2.3% has been “concreted over”. There is therefore no overall shortage of land. Our present housing crisis is due to developers’ land banks, the reliance on rising land prices and planning blockages fuelled by government policy too often left in the hands of ageing local councillors, some of whom may have a vested interest in protecting their own housing assets to the detriment of younger first time buyers.

Increasing Longevity

Whilst the charge towards property as an investment vehicle went into full throttle, another powerful phenomenon was beginning to shift society. This came in the form of increasing longevity. The post-war babies were breaking all records over the lengths of their lives. Our parents, grandparents and great-grandparents are making it more often into their 90s. Whilst this is welcome news to all of us lucky enough to have our relatives around, the impact on the housing market has been the strangulation of intergenerational wealth passing down the generations, and that wealth not passing down at the right time of life.

The Rise of Generation Rent

Speak to anyone in their 20s or 30s and most will say they are caught in the rental market, especially in the South East of the UK. Current estimates place average monthly rent demands at just shy of £1,000, meaning that – after all other bills – there is little left to save for a deposit for buying a home. An Affinity Sutton report goes further and suggests that the private rental market is now unaffordable for many low-income families, putting ever-greater strain on social housing.

First-Time Buyers

According to Yorkshire Building Society it will take someone saving £250 a month eight years to save the 20% deposit required to get on the housing ladder. What is laughable is the idea young people will have that kind of disposable income to spare. For university graduates – who might traditionally have counted on becoming home-owners – the trebling of most tuition fees will leave them with an estimated post-degree debt of at least £40,000. Now nearly 40 years of age before they can expect to get on the housing ladder, professional couples are putting off having children until they feel they have the property security required (near the schools and services they need for long-term family welfare). A Joseph Rowntree Foundation 2012 study predicts more than 1 million under 30s will be locked out of home ownership by 2020.

The Financial Crisis

The Treasury’s launch of a £80 billion Funding for Lending Scheme after 2007’s global financial crisis has done little to help the housing market except to send a clear signal that falling house prices are not an option. A housing market fall would put “untouchable” grey voters’ retirement savings – locked into housing – at risk, and any government would have to be brave indeed to take on their core voters in order to help young people who vote less.

Turning the Key

As well as build, build, build and unblock planning, there are other options to help re-balance housing more fairly across the generations. Encouraging more downsizing is one solution that would mean offspring could claim back the space they need to thrive in larger family homes. IF recommended a number of nudge policies including stamp duty holidays for those downsizing and greater government help for those (and there are many) who wish to downsize but find the very idea too overwhelming to consider.

Increased intergenerational living is another option and government could encourage greater take-up by increasing the Rent-a-Room tax allowance from £4,250, unreformed since the 1980s. Intergenerational living is a win-win argument for society as a whole. Schemes already exist where young people exchange time and chores for a reduced rent whilst also reducing the isolation felt by sole older occupiers.

Finally, tax breaks in return for more stable, long-term tenancies should be considered, so good landlords are rewarded.

IF’s position is simple. UK young people are facing a juggernaut of liabilities hurtling down the generations – from pensions and education to taxation, the environment and housing. All political parties are guilty of placing short-term gain before sustainability. Intergenerational fairness crosses all party lines. Unbalanced housing wealth is helping to break the “British Promise” that each generation should be better off than the one before. We may be seeing the first generation to have lower living standards to those of their parents.

 

4 thoughts on “Housing for the Younger Generation: Locked Out and No Way Back?

  1. Barry Pearson

    Let’s add a bit more analysis to this article:

    1. As this article says, the number of “family units” (from 1 person upwards) who want their own home has been rapidly increasing. Reasons include longevity, being single, and (not mentioned above) immigration. And the consensus is that not enough houses are being built to match this increase in numbers of family units.

    If the number of houses in the UK is (say) only 80% of the number of such family units, then moving people around, for example downsizing, still leaves a 20% shortfall. (I don’t know what the real percentage is). How has that helped?

    Spare bedrooms are only relevant if they are in houses that can be afforded by the people who need those bedrooms. Therefore, people in houses that can’t be afforded by young people starting families should be encouraged to stay in them. And people who can afford houses that young people can’t afford, but are currently in houses that those young people CAN afford, should be encouraged to upsize to those more expensive houses. Better-off people should be encouraged to stay out of the housing market relevant to those younger people, because their extra purchasing power will make things even worse for those younger people.

    (I suspect the above will be disputed, but if so I will be interested to learn where my analysis is wrong).

    2. It is unsurprising that housing wealth is becoming concentrated in the hands of (some, not all) older people. Those older people have had decades to steadily move up the “housing ladder” and pay off their mortgages. Housing wealth would become concentrated like this even if there WERE enough houses.

    (At the end of last month I made my last ever mortgage payment, after 38 years of paying a mortgage every month for a series of houses. For the first ever I own a house outright. Arguably it is too large, with what used to be 3 bedrooms. But why should anyone imagine that any young people starting a family would be able to afford a house that I signed the contract for at 40 while single and childfree?)

    Take today’s young generation and project forward 30 to 40 years. Don’t we expect that cohort’s housing wealth in future to be vastly greater than it is today? (I’m not discussing whether it will match the housing wealth of today’s older people. I’m making the point that the housing wealth of any cohort will increase over time, just because of natural lifetime changes).

    3. In 65 years I never heard of the “British Promise” that each generation should be better off than the one before, until reading it on this website!

    But it is being viewed very narrowly here. If we listed (say) 100 measures of whether someone is better off than another, I’m pretty sure that the balance would be in favour of the younger generations. Naturally the other parameters get a lot of attention, but that is partly because so many parameters are taken for granted. Here are some examples based on legislative changes since I got the vote at 21:

    Reduction of the voting age from 21 to 18 (1969). Reduction of the minimum age of an MP (and I think other elected officials) from 21 to 18 (2006). Increase of the minimum school leaving age from 15 to 16 (1972). Then gradually over the decades, increase of the proportion going to university from about 5% to about 35%. With a corresponding increase in the average age at end of full-time education from just over 15 to about 19. Introduction of Child Benefit which gives an allowance to the first child as well (1977), replacing Family Allowance which didn’t pay for the oldest child. Removal of the default retirement age (2011). Upgrade to a larger flat-rate state pension (expected 2016).

    Generations typically DO try to leave things in a better state for later generations. They often temporarily fail in specific areas for all sorts of reasons including external factors beyond their control. But gradually things improve, often driven by people who don’t personally benefit from the changes but who simply think these are the right things to do. Here are some other examples:

    Life expectancy (at birth) from about 68 when I was born to about 77 now. A more enlightened UK, with greater tolerance and acceptance as a result of various equalities and human rights legislation.

    My cohort (I was born in 1947) wanted to ensure that later generations didn’t struggle as we did: born into severe austerity (and rationing), I was brought up (until 21) in a council flat on a council estate which would not be acceptable nowadays. We didn’t want later generations to be afraid of nuclear destruction during the cold war. Or to worry about such diseases as polio, measles, whooping cough, etc. All of those represent higher living standards.

  2. Bryan Llewellyn

    With regards to your second point Barry about generational housing wealth, I think the issue being raised in the article and expressed by the Intergenerational Foundation generally is that society may well be facing a tipping/breaking point on Housing and other issues. You ask “Don’t we expect that cohort’s housing wealth in future to be vastly greater than it is today?” and I think the point is that though we may expect or have been led to expect such an outcome that may not be what happends if the current situation continues unaltered.
    If we ask whether housing and the financial products aimed at first-time buyers have been becoming more or less affordable over time I would suggest that the latter is the case (and I would be surprised if the available evidence doesn’t support this – Liz Emerson presents some such evidence in her article). Assuming first-time housing is and continues increasing in cost then logically the proportion of each younger generation unable to afford to start buying a house and gaining that foot on the property ladder will also increase. At some point the proportion of a particular younger generation unable to buy will exceed the level required to ensure that generation is eventually able to match the housing wealth of previous cohorts. What consequences for the housing market and more importantly for society would the realisation that such a situation had been reached have? And of course ever-increasing numbers of young people would realise that the dream of home ownership was indeed just a dream before the actual housing wealth tipping point is reached. The Home Owning dream holds such a dominant place in our society, economy and politics that if it is indeed threatened by pressures including the generational ones then careful consideration must be given to the consequences and response.

  3. Barry Pearson

    Bryan Llewellyn:

    See my (big) article “The effect of baby booms on the housing crisis of younger people”. Especially see its later section “Trends in percentage house ownership of various cohorts”. I make the point, based on the graphical evidence there:

    “There are 2 sorts of changes happening over time: older people are dying, and the percentages of each cohort who own houses is changing.

    “There is no indication that people born before 1956 are increasing their house ownership. Indeed, it is possible that after peaking at up to 80% the percentages are declining, see the first 3 cohorts in the graph. Are some of these people selling their houses, and if so why? Are they moving into managed housing or long term care?

    “It is clear that people born after 1955 are increasing their house ownership, although the 1956-1965 cohort appears to be peaking at perhaps the 80% level of older cohorts. It might increase from the current 21.5% of the gross housing wealth to about 22% or so.

    “The 1966-1975 cohort here is about the same as the 1965-1974 cohort (see earlier graph in blue) that owns more gross housing wealth than any other 10-year cohort. And isn’t hasn’t peaked yet! It currently owns nearly 22%, and this might increase to 23% or so.

    “It is too soon to predict the future percentages of people born after 1975. There is a consensus elsewhere that they are tending to start later, but there is no indication of whether they too will eventually reach about 80%, or more or less than this.”

    I also make the point:

    “The housing problems of younger people are often expressed in terms of their typical ages. But they should be expressed inter alia in terms of the average time since the end of full time education. In 1965, the average end of full time education was a little over 15, while nowadays it is about 19. This would be expected to increase the average “first-house age” by nearly 4 years over that time. It isn’t valid to be concerned about the higher “first-house ages” of younger people without accounting for such factors.”

    Can anyone predict what will happen if the earlier cohorts are indeed reducing the percentages of them who own houses? And then as the ones who DO own houses die?

    There is no doubt that financial products have become more expensive. Some of this may be to reduce the risk to all concerned. My endowment mortgage (thought to be respectable at the time) went badly wrong (as did lots of them) and I lost lots of money and it took a further 5 years to pay off my mortgage. (Had I had children I may have had to buy-down to afford the loss). I suggest it is wise to reduce such risks.

    How much of the problem is a delay rather than failure for most to get on the housing ladder? The earlier cohorts achieved about 80%, not 100%. Even if young people reach the percentages of earlier generations, which I agree they may not, there will still be that 20% who don’t own a house and may be vocal about it.

  4. Jackie T

    paragraph edit:

    A middle income family buying a 3 bed semi in the late 70′s could expect the mortgage to be one full months income of one of the couple at an interest rate in double numbers at that time. For the same term and the same property with the current interest rate it would be half of one income

    In the 70’s interest rates were 5 times the % to what is payable now.

    This would be why houses on paper were sold for less but in terms of income was much more. Where the cost to buy was 5 times higher in interest, demand fell and so too did the prices.
    Where the mortgage interest has reduced to a fifth, demand increases so the house prices do…. it is nothing to do with enjoying wealth and plundering it from a future generation. …….. as the debt chart shows the opposite is true

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