The announcement of the 95% mortgage in this week’s budget may have initially sounded like good news for those in “generation rent” who have struggled for years to get onto the housing ladder. However, Lizzie Simpson, IF Researcher, explains why this policy is likely to make homeownership increasingly unachievable for young people in the longer term
Over the last few decades, house prices have increased dramatically in comparison to incomes, so much so that in 2019, average house prices in England were around 7.8 times average annual earnings. Despite the economic disruption caused by the COVID-19 pandemic, the Stamp Duty holiday introduced in June 2020 meant that house price inflation continued and 2020 saw house prices increase at the fastest rate for six years. This has made it incredibly difficult for younger generations and aspiring first-time buyers to be able to buy a home.
Yesterday the Chancellor unveiled a new policy to address this, with the aim of turning “generation rent” into “generation buy” by offering government-guaranteed 95% mortgages, meaning buyers will only need a 5% deposit to buy a house. The rationale behind the policy is that many aspiring first-time buyers often struggle to save up for the large deposits required to obtain a mortgage. This has been even more of an issue during the COVID-19 pandemic, as low-deposit mortgages have practically disappeared because lenders are reluctant to give out higher-risk loans in such a precarious market.
House price inflation
However, a big flaw in this policy is that it is not being accompanied by a significant increase in housing supply. Despite the government’s pledge in 2017 to build 300,000 houses a year, it has consistently missed this target, with this past year having an even lower rate of housebuilding than normal due to delays resulting from the COVID-19 pandemic.
Therefore, in simple economic terms, the 95% mortgage policy is likely to drive up demand for housing without increasing supply, which will result in house prices rising. This house price inflation will consequently benefit existing, mainly older homeowners who will see increases to their housing wealth, while younger people will be increasingly priced out of buying a home.
Help to Buy
This new policy bears a lot of similarity to the 2013 Help to Buy scheme, which saw the government offer low-deposit mortgages for first-time buyers purchasing new-build homes. A later evaluation of this scheme found that, rather than helping lower-earning young people to access affordable housing, it mostly benefited higher-earners, and that 3 out of 5 buyers involved could have bought a house without the scheme. In addition, this policy raised house prices and particularly inflated the value of new-build houses, meaning that the real winners of the scheme were housebuilders and existing homeowners, rather than first-time buyers.
It is also worth noting that, unlike Help to Buy, this new 95% mortgage policy is not restricted to first-time buyers and is available to anyone to use, for properties up to £600,000. The average cost of a first-time buyer home is currently around £220,000, so it is unclear how a scheme with such a high upper property price limit benefits first-time buyers any more than any other group.
Wages to house prices ratio
Another issue with the 95% mortgage policy is that while it may have lowered the deposit, it has not lowered the salary thresholds necessary to be eligible for a mortgage, with lenders generally offering mortgages based on 4.5 times annual household income. Therefore, for those with lower incomes, there still may be difficulties in accessing this mortgage.
Younger people’s wages had already been stagnating for years before the pandemic, with younger generations today earning less in real terms than their parents and grandparents did at the same age. Young people are also more likely to have been furloughed or made redundant during the COVID-19 pandemic, while the proportion of 18–24 year-olds claiming Universal Credit has increased more than any other age group over the last year.
In addition, while the budget focused on buying homes, there was no mention of any policies intended to support those in the private rented sector, where a high proportion of young people currently live. Many renters have struggled financially over the last year, with over 800,000 private renters having built rent arrears since the pandemic began: approximately 7% of all private renters, rising to 14% of 18–24 year-old renters and 10% of 25–35 year-old renters. Coupled with a recent study finding that 60% of private renters have no savings at all, for many renters being able to save up for even a 5% deposit is practically impossible.
It is therefore unlikely that the new mortgage scheme will be accessible for the many younger people on low wages, or for those who have been hit hard financially by the pandemic. Like Help to Buy before it, this scheme is likely to mostly benefit those who are on higher incomes or have financial support from families, while those who are struggling financially are left behind.
Helping “generation rent”
In summary then, we need to call out this policy for what it is: not a “first-time buyers” scheme or a solution for “generation rent”, but just another in a long series of government interventions in the housing market to ensure house prices stay high, benefiting older homeowners at the expense of younger renters.
If this government truly wants to help first-time buyers, a better approach would be to try to decrease the gap between house prices and wages, so that housing becomes more genuinely affordable. Especially in light of the COVID-19 pandemic, the focus should be on providing support to renters and younger people who are unemployed or on lower wages, as these measures will ultimately be more successful in helping younger people realise their dream of becoming homeowners.
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