Thatcher’s dream becomes a nightmare for a jilted generation

The jilted generation have been brought down to earth with a bump. The education system has failed this generation by not providing basic budgeting skills, so for many the idea that other spending impacts on the ability to pay the mortgage seems alien. For others this is common sense.

Taken from the Guardian this headline highlights a growing dilemma for individuals trying to get on the property ladder.

Not only have we seen house prices rise to unaffordable levels, but the new mortgage tests mean that those who previously might have been considered may find it very difficult to get lending now.

In Europe renting is the norm but in the UK, individuals believe it is their right to own their property (whatever their circumstances). Therefore anything that stops that from being achieved is an infringement of their rights.

For this reason many have expressed concerns that the basic budgeting questions (i.e. forensic analysis of spending habits) are an invasion of civil liberties. It raises the questions as to whether:

  1. Individuals should consider the ownership of a property as a right, or a privilege
  2. The dream of owning a property will simply wither and die, leading the UK to a more continental approach to housing in the future.

Stepping back in time

The UK housing market has had a dramatic change not only in the last 30 years but going back to 1900.

In 1900 renting from private landlords was the norm (90% was rented, 10% was owned). Over the decades that followed this changed with the rise of local authority housing and latterly housing associations.

But it was in the 1980s where a fundamental shift happened, which would change the face of home ownership forever.

What changed?

Politicians realised that home ownership could be a new asset class which grew broadly in line with wages, and gave individuals a sense of new found wealth.

Two things happened during the eighties which enabled this dream to be fulfilled:

  1. The Government enabled local authority tenants to purchase their homes through its Right to Buy Scheme (over 2.5 million properties moved to private individuals); and
  2. They deregulated the UK Finance Market and opened up the market to greater competition

By 2000 only 10% of people rented from private landlords, 70% owned their homes and the balance was serviced by social housing.

Jilted generation

The way individuals engaged with lending has changed over the last 20 years.

Individuals had to see their bank manager to secure lending up to a maximum of 2½ times earnings. To secure the mortgage individuals had to demonstrate their ability to pay back the loan and show that they had a sizeable deposit for the property.

Effectively individuals had to demonstrate sensible budgeting skills, or what is now termed an ‘affordability test’.

However, with the opening up of the mortgage market, greater competition supported a growing appetite for home ownership. Mortgage lenders became more creative which meant that those who had previously found it difficult to get mortgages (poor credit history and the self-employed) suddenly found it easy. The idea of sensible budgeting skills went out the window (free sweets for all!!!!)

Mortgage lending surged from £200 billion in the early 2000s to £360 billion by 2007 and house prices soon began to exceed the increase in earnings (meaning there was no longer a relationship between property value and earnings). This demand encouraged reckless lending as individuals became more desperate to get on the housing ladder.

This was not sustainable and the financial crash brought the party to an abrupt and messy end. What followed was a prolonged recession and bitter recrimination against lenders for fuelling this party (politicians and borrowers seemed to have avoided any blame).

Fast forward to today

There is a correlation between growth and housing, a growing housing market is a good sign for the economy. Various initiatives have been put in place to encourage people to buy homes and this has raised concerns that we are fuelling another boom / bust scenario.

The new mortgage tests take away the madness that fuelled the boom and although people might complain, this is going back to common sense corner.

The jilted generation have been brought down to earth with a bump. The education system has failed this generation by not providing basic budgeting skills, so for many the idea that other spending impacts on the ability to pay the mortgage seems alien. For others this is common sense.

However, as much as they scream and shout about how unfair the new rules are the consequence of not being able to pay the mortgage is far worse.

Another worry is for those who were able to get a mortgage a few years ago may now find that they are frozen out of the market because the new tests mean they can’t re-mortgage making moving house much harder.

We are already seeing a change – today long term private renting has risen to 15%, house ownership has dropped to 65% and the balance rests with social renting. In the future we could see home ownership decline further because people simply cannot afford to buy a property.

Conclusion

Successive governments encouraged irresponsible lending and combined with a ‘live for today’ attitude, this led to a housing boom which has pushed home ownership beyond the reach of many.

There is however a generation who believe it is their right to own a home (the jilted generation), and they must understand that this is simply not possible if the UK is to recover and not end up going down the route of the past.

For the so called jilted generation there are two outcomes:

  1. We see a massive correction in house prices (50% plus fall) – which is unlikely to happen; or
  2. We ensure responsible lending going forward – this means that home ownership falls and renting starts to become the norm

We suspect that point 2 is more likely to be the case; the challenge is that individuals need to accept this, which may be much harder to do.

 

NOTE: This is written in a personal capacity and reflects the view of the author.  The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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