New research from the Institute for Fiscal Studies shows how booming house prices and mediocre income growth has increasingly robbed the younger generation of the ability to buy their own home. For 25- to 34-year-olds earning between £22,200 and £30,600 per year, home ownership fell to just 27% in 2016 – from 65% two decades ago.
In other words, the chances of a young adult on a middle income owning a home in the UK have more than halved in the past two decades.
The findings are dire, but to anyone who has had half an eye on the situation for the past 15 years, they don’t come as a huge surprise. Ever since the early days of George Osborne and David Cameron, government housing policies trussed up as “solutions to the crisis” have focussed around rehashing various subsidy models for first time buyers. We’ve had Help to Buy, the Lifetime ISA, and most recently, stamp duty exemption.
But as anyone with a basic grasp of economics understands, in a tightly regulated housing market (that is, a housing market where there is inflexible supply), subsidies for the buyer have a negative effect on home ownership because the price effect – through increased demand – more than offsets the income effect from the subsidy. In less regulated markets (with flexible supply), subsidies do have a positive effect on home-ownership rates, but only for higher income groups.
Here in the UK, and especially in the South East, we have an extraordinarily inflexible planning system. Thanks to antiquated ‘green belts’, strict controls on height, lack of fiscal incentives at the local level to develop and ‘not in my backyard’ (NIMBY) behaviour, a vanishingly small 2% of England is built on.
Far from “solving the crisis”, government policies are exacerbating the problem. Thanks to huge demand, properties bought under the Help to Buy scheme rose by a whopping 12% between 2016 and 2017 – and in the same timeframe, the average total applicant household income under the scheme rose from £50,302 to £54,019. The rest of the market is not in much better shape. According to senior research economist and author of the IFS report, Andrew Hood, house prices have risen around seven times faster in real terms than the incomes of young adults over the last two decades.
The sensible answer, as has been said time and time again, is to build, build, build. But as the Conservatives don’t have the guts to do this, and (with the exception of Sajid Javid) it doesn’t look like they do, they should start seriously thinking about reforming the enormous private rental sector – which houses an incredible 70% of 25-34s.
It is now treated as common wisdom that the Conservatives lost the youth vote because the youth have no capital “and you can’t be a capitalist without capital”. But I’m not sure if it’s entirely true. Modern millennials aren’t as big on ownership as their parents were: we take out Netflix and Spotify subscriptions instead of buying DVDs and records, and because we settle down later and travel more in our 20s, we are often happy to rent and defer the responsibility of home ownership.
As the situation stands, though, renting doesn’t work. Middle earning millennials in London are spending well over half their income on rent, and are rewarded by landlords who turf them out with no notice and forbid them from putting the odd nail in the wall.
Jeremy Corbyn claims to understand this, and has focussed his housing promises on renting. He has promised to impose rent controls and has said he will tackle the uncertainty that many renters feel by scrapping laws that make it possible for landlords to turf out tenants with little notice and no explanation. This week, he even suggested making it illegal for landlords to ban their tenants from having pets.
If the situation in New York is anything to go by, rent controls are a bad idea. But the government shouldn’t be afraid to regulate the rental market better. European countries have far bigger rental sectors than we do, but they also have is much tighter regulation which lends some much-needed balance to the landlord/tenant relationship. At the moment, Britain’s landlords (who have also managed to hold onto to quite a few rather attractive tax breaks) have it all ways.
Most Millennials, of course, would like to buy a home at some point. But while Theresa May’s ministers work out what the hell they’re going to do about the housing supply problem, it should stop trying to pull the wool over our eyes with subsidy policies, and start thinking about how to make renting work. Millennials would thank them more than they know.
