New Year look-aheads are always a risky endeavour, and the level of uncertainty facing the UK economy at the start of 2017 means that the danger of looking foolish is even more elevated this time around. But we can be sure of one thing at least: our obsession with housing will show no sign of abating over the coming months.
Just three days into the year and we’ve already heard about plans for 17 new garden towns and villages and had confirmation that the first wave of building under the ‘starter homes’ initiative will commence in 2017. Both schemes are expected to deliver up to 200,000 new homes, although over very different timeframes. The government’s wider ‘garden settlement’ approach is expected to generate just 25,000 housing starts by 2020, whereas its manifesto pledge on starter homes promises that all 200,000 will be built within this parliament.
Given that building work hasn’t yet started, this deadline will very likely be missed. There are also concerns over just how well targeted the programme will be. It is available to first time buyers aged 23 to 40 and provides a discount of 20 per cent on the market value of the property. Yet, with discounts being made available on properties worth up to £250,000 outside London and £450,000 inside the capital, the extent to which the programme benefits those on low and middle incomes who have been most likely to find themselves locked out of ownership in recent years – or can be considered ‘affordable housing’ – is questionable.
These details – and the ability to actually deliver on stated ambitions – clearly matter. But the focus on boosting housing supply rather than simply supporting demand marks an important change of direction for the government. Schemes such as the Help to Buy mortgage guarantee (which closed to new applications at the end of 2016) did little to deal with the underlying housing problem facing many families. Such demand-side approaches have all too often provided no more than a leg-up to those who would eventually climb onto the housing ladder anyway. Consider for instance that the median income of those households benefiting from the scheme is £40,600, only slightly lower than the figure of £45,400 recorded across all households buying a home with a mortgage in the same period.
As we’ve shown before, the housing crisis facing the UK is about much more than access to ownership, with housing costs increasingly dragging on living standards for families in all forms of property. We’ve also recently shown that official homeownership statistics may overestimate the number of homeowners and underestimate the number of families in the private rented sector. Yet, as new data from the Bank of England highlights, the government must deal with the consequences of a clear ‘aspiration gap’ among younger non-owners.
Of those households headed by someone aged under-45, roughly half (54%) owned their own home in the second half of 2016. As the chart below shows, just under half (45%) of the remaining 46% definitely expect to buy at some point (with only 28% ruling out future ownership altogether). If these expectations were matched, then homeownership rates among existing under-45s would reach 75% over time. That’s higher than the 71% homeownership rate recorded by those aged 45+ currently. With homeownership rates falling sharply since the mid-2000s, the implication is that significant numbers of younger households face falling short of their expectations.
And, even if their expectations are more realistic, it’s apparent that large parts of the ‘never buy’ population are also unhappy with their situation. As the next chart shows, of those under-45s saying they don’t expect to buy in the future, most point to barriers rather than to preferences. For example, 44% said that up-front purchase costs (deposits, stamp duties and legal fees) were one of the top three barriers and 30% pointed to ongoing mortgage costs. Just 13% of the group (accounting for just 4% of all non-owners aged under-45) said that they actively prefer the flexibility of renting, and only 7% (or 2% of all non-owners) stated that wanted to stay where they were.
The extent to which this picture has changed over time is highlighted by the final chart. It shows the theoretical number of years required by a typical low to middle income household (of all ages) putting aside 5% of its disposable income to save for a typical first time buyer deposit. Having stood at just three years through the 1980s and 1990s, the figure now stands at 22 years.
One response to this ‘aspiration gap’ is to manage expectations. After all, renting has long been the norm in Germany. Yet the UK is far from an outlier across the OECD, sitting in the middle of the pack on homeownership rates. Certainly there is a need to improve the attractiveness of renting in the UK – both in terms of quality and cost – but it is unrealistic to expect any rapid change in attitudes. Indeed, for all the differences between generations currently being explored by our Intergenerational Commission, the aspiration to own stands out as one thing that hasn’t shifted at all.
And importantly, as well as being how people want to live in the here-and-now, homeownership plays an important role in building wealth, providing leverage and hedging against costs in retirement. Again the generational angle is central here: millennials are projected to have smaller pension pots that their parents but live quite a bit longer, so we can only expect housing assets to grow in importance. While we clearly shouldn’t put all our eggs in the ownership basket, it would be unwise to abandon it altogether.
Boosting housing supply will clearly play a key role in rising to this challenge. This can’t fill the ‘aspiration gap’ overnight (and it’s important that we don’t give up on finding solutions for those in need in the here and now, as the Redfern Review has highlighted), but it’s vital that the country takes a long-term view of its housing situation and puts the building blocks for reform in place now. While questions over scale and timing abound, the government’s change of direction on house building is welcome. We must hope that this is one good intention that – unlike all too many at this time of year – stands the test of time.