Review of home ownership in UK shows severe decline in young buyers
The first major review into home ownership in the UK in over a decade reveals that the financial squeeze on young people is at the heart of the decline in the number of home owners and calls for a long term approach to housing issues.
The independent Redfern Review reveals that home ownership is the tenure of choice for 80% of people but it has declined the most among young people, falling over 20% in just 12 years.
It says that the two biggest drivers of the fall in home ownership since the financial crisis in 2008 have been the marked relative fall in incomes of would-be first time buyers and their access to mortgage finance.
The most comprehensive review into home ownership and the wider housing market says that although home ownership is important, to create a fair market that is accessible for all there needs to more focus on all housing tenures.
It proposes the establishment of an independent Housing Commission to lead an overall strategy and take a non-partisan approach to long term housing decisions and adds that as long as conditions remain broadly the same, the rate of decline in home ownership is likely to stabilise in the near term, giving a sound basis for future, sustainable improvement.
‘The detailed analytical work of the Review reveals the challenges that young people face in buying their first home and highlights the impact on them of long term falls in relative incomes and ability to borrow,’ said Pete Redfern, chief executive of Taylor Wimpey, who led the Review.
‘We must focus on supporting today’s younger generation and creating a genuine long term housing strategy independent of short term party politics if we are to improve the position in a sustainable way for future generations,’ he added.
The details of the report shows that the main cause of the 6.2% fall in home ownership between 2002 and 2014 include the higher cost of and restrictions on mortgage lending for first time buyers, namely tougher first time buyer credit constraints. This is estimated to have cut 3.8% off the UK home ownership rate from 2002 to the end of 2014.
The biggest contributor to the fall in the home ownership rate before the financial crisis was the rapid increase in house prices. Between 2002 and 2014, higher real house prices are estimated to have reduced the private home ownership rate by 2.6%.
A third major driver of the fall has been the decline in the incomes of younger people, aged 28 to 40 relative to people aged 40 to 65, i.e. the income of first time buyers relative to that of non-first time buyers. This younger age group’s average income fell from approximate parity with the over 40s to some 10% below in the wake of the financial crisis. This reduced the relative buying power of would-be first time buyers, pulling down the home ownership rate over the period by around 1.4%.
In common with other studies, the review found that the impact of new supply on house prices in the short term is very small. For example, even increasing home production to around 300,000 for one year would reduce prices by only 0.6% given recent rates of household formation.
‘New household formation and supply have been broadly in balance over the last 20 years and therefore the significant increases in house prices over that period have not been driven primarily by supply constraints,’ the report says.
‘We strongly encourage the current and future Governments to look long term at home ownership issues and to adopt a principle-led strategy against which individual, short term actions can be assessed,’ it adds.
It describes the Help to Buy schemes as useful in helping first time buyers but express concern about the inflationary aspects of the scheme and recommends it is targeted more exclusively to first time buyers and at lower price points on a regional basis.
The review points out that far more could and should be done to provide a healthy and stable renting environment, providing a better opportunity for young people to save and a better set of conditions for longer term renters and concludes that just increasing supply is not enough if the barriers to entry to the housing ladder are not addressed.
Harry Mears, UK head of social housing at KPMG, said that the playing field between home ownership and rental is certainly in need of levelling. ‘The housing market has been unjust for some time and attempts to address the issue to date have been patchy at best. With this review, conducted by experts with a deep knowledge of the sector, we could well see a step change on the horizon, but knowledge must be turned into long term collaborative action,’ he added.
Peter Williams, executive director of the Independent Mortgage Lenders Association (IMLA) explained that for some time the IMLA has cautioned that post financial crisis restrictions on mortgage lending have hampered first time buyers’ prospects.
‘In order to get on the ladder first time buyers need to access higher loan-to-value (LTV) products which are now more limited than before. The IMLA has recently called for an independent review to assess the specific impact mortgage regulation has on the housing market and the Redfern Review helps bring this issue to the fore,’ he said.
The IMLA also welcomes the calls for policymakers to promote a healthy and stable rental market. ‘The private rented sector plays a hugely important role in providing affordable and secure accommodation to millions of people, and it is important that policymakers avoid damaging it in order to encourage specific tenure types. By discouraging buy to let investment and raising landlords’ costs, the government risks increasing tenants’ rents which would make it more difficult for them to raise deposits,’ Williams pointed out.
He added that there has been a clear lack of long term focus when it comes to housing policy with six different housing ministers since 2010 alone. ‘According to the IMLA’s latest Intermediary Lending Outlook, three fifths of mortgage lenders feel the housing minister merry-go-round contributes to the lack of cohesive housing policy. An independent body could help address this,’ he added.
According to Ishaan Malhi, chief executive officer of online mortgage broker Trussle, it will take a long time to create a market where homes are more affordable for young first time buyers on moderate incomes.
He suggests that the industry should be encouraging young people to engage in the process of buying a home at the earliest possible stage. ‘The mortgage sector is beginning to emerge from the dark ages and there are now free brokerage services and online tools which can help first time buyers to understand what they can afford and what they should aim for, enabling them to adapt their lifestyle and adopt better financial planning to achieve the goal of home ownership at a younger age,’ he added.
John Eastgate, sales and marketing director of OneSavings Bank, also believes that affordable rental homes are needed to those aspiring to become home owners and pointed out that next April’s tax changes for buy to let landlords are set to only exacerbate the problem of falling home ownership, as landlords push up rents to cover their further costs.
‘It will be young aspiring home owners, already facing a constrained ability to save through rising inflation and low interest rates, that will shoulder these costs. It’s also right that we look at the impact of regulation in this. Mortgages are more affordable than ever yet tighter affordability tests based on interest rates that are unlikely to be seen in a generation have made access to finance more challenging and first time buyer levels remain below their pre-crisis peak,’ he added.