The rise in property prices shows few signs of abating. Pundits often predict a property crash is around the corner, but the actual numbers just keep going up. As a result of supply and demand mismatches, along with other economic factors, house prices in the UK recently rose at the fastest rate seen in 18 years.
Halifax, the country’s biggest lender, reported house prices jumped 13% year-on-year in June, the highest figure seen since late 2004. Demand from buyers is still there, even in the face of a cost of living crisis and “extremely low” levels of supply.
As these prices continue to rise however, huge swathes of would-be buyers are being completely priced out of the market. Wage increases are not even coming close in keeping up with property prices and according to Rightmove, the average solo first-time buyer now needs a deposit of £74,000 to get on the ladder.
Out of sheer necessity, more people are having to embrace the rental market. Investors caught onto this. Towards the final stages of the pandemic, when pessimism still loomed over other investment assets, the number of BTL landlords reached an all time high of 2.7 million. BTL investors were keen to take advantage of stamp duty perks and low mortgage rates but as the rental market expanded, supply issues emerged once more. Turning generation rent into generation buy may end up a secondary goal if we can’t resolve issues in the rental market first.
What is generation rent? Defining who they are
Broadly, generation rent consists of those who are (or will end up) spending most – if not all – of their adult life in rented accommodation. This may often be the result of not having enough wealth to afford property, but those in this generation may also choose to rent even if they can buy a home.
Generally, younger generations such as millennials and gen Z fall under the generation rent umbrella. But for investors and the wider economy, the real question should not be what is generation rent, but what’s caused so many not to be able to own property in the first place.
Renters, as a group, are becoming much more substantial. Roughly five million households currently rent in the UK, up from 2.5 million in 2000. But, just as with the supply-side of the buying market, the availability of rental properties is leaving a lot to be desired. Propertymark, the industry body, recently surveyed letting agencies across the UK and found the number of available rentals on their books have, on average, more than halved from over 30 to 15.
Predictably, this has led to skyrocketing rents. Average rents in the UK have reached a record high of £1,113, according to the latest data from HomeLet. In London, tenants are spending almost £2,000 a month. Changing tastes and priorities have also led to booming demand in the Nation’s cities.
As the pandemic forced people to work from home, workers flocked to the countryside for more space and a bit of greenery. However, as the world returned to relative normality, many ended up desperate to return to their cities. Rightmove noted rental appetite is growing in the UK’s 50 largest cities, with competition among tenants up by 29%.
These changing dynamics are expected to have long-term impacts. If recent trends continue, renters could outnumber homeowners by 2039, according to VeriSmart. Given these realities, efforts have been made to make renting more attractive. The fairer private rented sector white paper and Levelling Up and Regeneration Bill being obvious examples.
And while it’s true that some people may prefer the relative freedom renting brings, most are still keen to own their own home. An Ipsos Mori poll from last year revealed 81% of people want to own their own home rather than rent. Additionally, almost half of the UK’s tenants want to buy the home they rent from their landlord.
No matter how alluring renting can be, we remain a nation keen to own what we live in.
It won’t be easy turning generation rent into generation buy
In trying to turn generation rent into generation buy, a top priority should be addressing the supply and demand imbalance. There’s no getting around it, more houses will need to be built. The Government’s record on this has been less than ideal so far. Currently, the state wants to build 300,000 new homes per year into the mid-2020s to create sustainable levels of supply.
In 2021, 181,810 new homes were completed across the UK, 40% lower than the Government’s target. This was a shortfall of around 180,000, the highest level seen since 2007. Private developers could help fill the void, but they have been accused of cartel-like practices in recent months. Developers and builders also need to keep in mind who they’re building for.
Across major cities, modern apartment buildings seem to be constantly erected and while they’re often marketed towards first time buyers, they’re likely out of budget for many. More homes will prove crucial but specifically, we need ones created specifically for those yet to get on the ladder.
Further incentives may also be needed to encourage property investment. Young people, who are more likely to be first time buyers, are set to inherit billions over the coming years. Making property an attractive investment for these billions could be paramount. Some solid efforts have been made so far in this regard.
What has been done so far?
The state launched a 95% mortgage scheme where it underwrote the loans and recently, Halifax made waves by offering 5% deposit mortgages for new builds without Government backing. A Right to Buy revamp for the 21st century is also in the pipeline. More innovation for high LTV lending could be welcomed. Cutting secondary costs, such as legal and surveyor fees, may also not be a bad idea.
However, despite these efforts, there are limitations elsewhere. The Help to Buy scheme will be ending next year and even with apparent exemptions in place, one in four first time buyers are being hit by stamp duty charges. A review of existing rules may be needed to limit the drawbacks for buyers.
Focusing on other niche areas could also bring in somewhat unexpected investment from first time buyers. To turn generation rent into generation buy, houses for them to live in may not even be needed. Many priced out of London and the South East are instead purchasing buy-to-let properties throughout UK. More first time buyers could come forward if they’re encouraged to make a buy-to-let investment.
Putting in efforts now to support the next generation of buyers could do wonders for the wider economy down the line. Despite the challenges being faced by first time buyers, the market is still expected to reach £73bn by 2024. Supporting this will be important as those who can’t get on the ladder may delay other milestones such as getting married and raising a family. A stitch in time saves nine.