Intervention is needed to save the dream of homeownership

Lucy Mullins is co-founder of StepLadder

The aspiration, importance and challenge of homeownership has always been a topic that resonates deeply with people in the UK. Other European countries don’t have the same fascination with buying a home and many people are happy to rent to retirement and beyond. But in the UK, attitudes regarding the purchase of property are clear –  a 2016 survey showed that 77% of people would prefer to own their own home over the longer term. I think we’ll see this number rise further with three months locked down in our homes amplifying the importance of having a safe and comfortable place to call your own.

In the most recent Queen’s Speech, it was explicitly stated that the government would “take steps to support home ownership, including by making homes available at a discount for local first-time buyers.” This is an important statement but without proper action, innovation and intervention the dream of homeownership for young people is under threat. Of course nobody could have guessed at how the six months following that statement would evolve but it’s also true that we may never be able to ‘fairly’ judge the government on their policies towards homeownership. The original plans risk disruption because of this generational health crisis, but we were already facing another generational crisis and we must persist and find the antidote to this challenge of homeownership too.

The state of play for first-time buyers prior to the pandemic

It was already difficult enough to make that vaunted first step onto the property ladder. Young people are confronted by a number of significant economic obstacles, and the result of this has been an absolute collapse in homeownership rates for this generation. Studies have shown that those born in the late 1980s are nearly half as likely to be a homeowner by 27 as those born just 10 years earlier.

The primary reason for this has been the rapid decoupling of house prices and incomes. After adjusting the figures for inflation, average house prices were found to be 152% higher in 2016 than they were just two decades prior. Meanwhile, the real net family incomes of those aged between 25-34 only grew by 22% over the same time period. Further compounding the situation, the stringent lending criteria introduced at the tail end of the 2008 financial crisis has caused the size of the average mortgage deposit to increase to £33,000.

As a result, even those with relatively high salaries have found it difficult to climb onto the property ladder.

The complications caused by Coronavirus

The health risks posed by Coronavirus are disproportionately faced by older people. However, the burden of the economic impact is largely held by younger people.

Young people are more likely to be employed in parts of the economy which will have been partially or completely shut down due to social distancing measures. These include sectors like retail, hospitality and travel. At best, this will mean dealing with an insecure financial situation, and in the worst cases it will result in unemployment. This uncertainty will greatly impact the ability of a young person to save up for a deposit and could clearly impact their ability to meet the affordability criteria of mortgage lenders.

Secondly, the broader economic malaise has resulted in businesses of all kinds searching for methods of reducing risk. Mortgage lenders have done this by restricting the number of mortgage products on offer. At the onset of lockdown, the majority of lenders removed all mortgage products with a loan to value rate (LTV) of more than 75%. To get a mortgage like this you’d have to save a deposit of at least 25% to be accepted for the loan. This would essentially exclude many young people from finding a mortgage, given that this works out to an average deposit size of nearly £58,000 in real terms, almost double the UK’s median household income. Many mortgage products have begun to return but there is still a lack of 90% and 95% LTV mortgages, which are most needed by first-time buyers.

How we can support first-time buyers

We need to see clear and decisive action to support the needs of first-time buyers, just as has been done for businesses in general.

One of the ways to do this would be to reform the stamp duty exemption threshold for first-time buyers. At present, first-time buyers are given an exemption from paying stamp duty on properties up to the value of £300,000 or £500,000 in London. If the government is serious about supporting first-time buyers, then they should consider going further. In London for example, the average price paid for a property is approximately £640,000 at the time of writing.

Another area that would benefit from reform is the Help to Buy (H2B) equity loan scheme. It’s a dead end – a potentially risky and expensive policy for the taxpayer disproportionately favouring property developers. These rationed 95% LTV mortgages – with the taxpayer on the hook for 25p in the pound of the property sale price – are only available for certain new build flats and homes. This has been creating price distortions in markets where new builds eligible for H2B are now often measurably more expensive on price per square foot than the local market. Policy intended to help all first-time buyers should target what nearly all first-time buyers need – their mortgage. Regulatory capital relief to lenders on first time buyer mortgages could magnify lending capacity across the entire banking system and improve terms for first time buyers across the country.

Sounds technical, right? Well, it’s just like waiving stamp duty for first-time buyers – a policy change that can be widely applied because it fixes essential plumbing: borrowing terms for the first-time buyer. How would it work? All banks offering mortgages to first-time buyers would need to set aside half as much expensive regulatory capital – a savings that, in the competitive home lending market, should translate into lower cost (or higher mortgage amounts available) for the first-time buyer. Since any first-time buyer would bring this eligibility with them to all lenders and regardless to the property, it would make them more attractive than other borrowers – all things being equal in terms of affordability and credit. Also, it would free the first-time buyer from the expensive new build market – as the benefit applies via the lending bank, not the property seller. Finally, this policy would be less risky for the taxpayer. Gone is the long term exposure of significant portions of property value for a small subset of properties. In its place, would be a levelling-up of first time buyers across the board.

As we emerge from lockdown let’s make sure we don’t find a whole generation locked out of owning their own homes.