The real barrier to millennials owning a home is not the mortgage – it’s the deposit

Published on Housing, Wealth and Debt

Has the heat finally gone out of the housing market? New data from the Nationwide published this week suggested it might just have, with the cost of the average home falling by more than 3 per cent in the last month. But before aspirant home buyers start putting out the flags, it’s worth setting this change into the longer term context.

Since 2000, house prices have risen more than 250 per cent in the UK, greatly outpacing earnings which have grown by just 68 per cent over the same period of time. Small surprise, then, that today’s young people are just half as likely to own their home at the age of 30 as the baby boomers were at the same point in their lives.

This stark generational fall in ownership is not explained by the costs of servicing a mortgage however – in fact, today’s low interest rate environment means that many young people who buy a home have a far easier time than previous generations in this respect. Deposits are the real contemporary challenge. In the 1990s it took the average young family just 3 years to save for a reasonable sized deposit; today it would take the same family 19 years to accrue the amount they need.

As a result, the ‘bank of mum and dad’ has become an increasingly important source of support for first-time buyers. A lucky 35 per cent of new purchasers had help from family or friends with a deposit in 2016/17, and 1 in 10 used an inheritance to fund the deposit. But where does that leave the many young people who don’t have family resources to fall back upon, either now on in the future?

Without reform, the prospects for these young people look bleak. For many, the only option will be to rent privately for most – if not all – of their lives. But as Generation Rent grows up, the tenure looks increasingly unfit for purpose. The growing number of families with children renting privately – up from just 600,000 in the early 2000s to 1.8 million today – has lead many (including ourselves) to call for greater security of tenure for renters today.

Even with such a change, however, home ownership is likely to remain an enduring ambition, not least because it allows families to build up an asset over time. So what more could be done to help those who cannot overcome the barriers to entry?

This week we put forward a radical proposal that every young person should receive a ‘Citizen’s Inheritance’ of £10,000 at the age of 25. These funds would be restricted use: they could cover the costs of education and training, be put in a pension pot, or critically be used to buy a home. This amount would go a long way to help, covering 40 per cent of the average first time buyer’s deposit in the UK today.

However, the boldness of the proposal lies as much with its source of funding as with the giveaway. We argue that inheritance tax should be replaced by a Lifetime Receipts Tax, meaning that those lucky enough to have a ‘bank of mum and dad’ to draw down on share some of this wealth around. By shifting demand for housing rather than increasing it, inflationary pressures on house prices should be keep to a minimum (and building more homes which we call for as well would put downward pressure on prices too).

Greater security in the private rented sector and a fairer level of support with home ownership: unlike a one-month fall in house prices, that really is something worth cheering about.

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