The best time to plant a tree is 20 years ago, the second-best time is now
I am currently getting used to the idea that my daughter is leaving home. It’s not an easy process, mainly because she doesn’t know about it yet.
To be honest, I’m not throwing her out, she’s just 16, but at some point, in the not too distant future, independence will become her ideal, or, it will, if she’s anything like me.
Then we have the difficult reality check of cost and access to a mortgage. Living in the South-East means a flat is going to cost in excess of £300k, which means a minimum deposit of £30k to £40k plus legal expenses
This leads us to the perennial question: Buy or Rent
Over the course of my career, I have met many people who have been told by a mortgage lender, that they cannot afford a mortgage
Truth is, they can afford a mortgage, but it’s normally the mortgage of their landlord (by way of rent), rather than their own property
It’s interesting to note that the maximum mortgage is normally 4.5 times your income (or incomes if joint) and, of all the mortgages taken using these maximums, over 50% were in London and the south-east
Rental sector facts
Private renters have grown by 4.5 million from 1998
However, the introduction of less attractive tax reliefs and increased stamp duty tax on second homes has led to a decline in properties being purchased by landlords in 2019 by approx. 40% from 2015
Unsurprisingly, this tightening rental supply on lower levels of new investment and continued growth in demand has resulted in rent growth accelerating
House prices are a figment of The Bank of England’s imagination
Since the Financial Crisis in 2008, The Bank of England eased monetary policy (printed more money), which then boosted asset prices, including house prices.
Low cost borrowing and access to easy money was always going to have this result, but the sting in the tail, is that as house prices rise, so do the deposits required to buy one
Trouble is incomes did not rise at the same level, meaning that we are now in a position where transferring from rented to private ownership has become much harder
Added to this, during 2014 the Financial Conduct Authority implemented swinging changes to stress testing how lenders make decisions
This is designed by The Bank of England’s Financial Policy Committee (FPC) and currently looks like this
Lenders check that borrowers would be able to meet mortgage payments if mortgage rates moved 3% higher in the first 5-years (affordability)
A soft cap that limits high-income multiple loans (those at or above 4.5) to no more than 15% of new loans (flow limit)
Working in tandem, these limits, mean higher deposits, in a time when people find it harder to save the higher loan to value lending as upward pressure on house prices pulls income multiples higher, restricting those borrowers with small deposits
So, what does the future hold for Parents trying to get their house back?
The cost of entering the UK housing market lies in a mix of economics, demographics, and tax
Most important is shift to a low rate of inflation which means households cannot rely on inflation to reduce the value of their debt in real terms. High levels of inflation
in the 1980’s together with higher growth in incomes, created the capacity for households to move more often and this supported higher levels of housing market liquidity
Today’s low-inflation environment combined with longer mortgage terms, increased life expectancy, an ageing population and social policy focussed on caring for elderly households at home means fewer moves
The latter point is compounded by the structure of housing supply with a relative undersupply of 1 and 2 beds. This creates a system of higher prices of 2 & 3 beds which limits the ability of households to extract sufficient levels of equity to make downsizing an attractive option
Although various governments talk about new housing, housing stock has grown by 191k homes on average in last 25-years.
That’s a shortfall of 177,300 p.a
Bank of mum and dad (gran and grandad)
Lengthening mortgage terms have been a consistent trend for the last 15-years. 30-year plus terms are now commonplace
Lifetime mortgages and product innovation in the over 55 age market has grown exponentially in recent years. Many later life mortgages are being used to find deposits for adult children trying to fly the nest
What does the future hold?
Artificial Intelligence and data science will become more widespread to segment parts of the borrowers to enhance underwriting.
This will ultimately mean certain types of buyer will benefit over others (high vs low deposit and income security)
Several groups remain less well served – small deposits – single person households – households with complex incomes – older households
One shining beacon of hope, is that as more borrowers opt for longer-term rates (5-year deals), and average moves are further apart, competition within the market will intensify between lenders
So, when will I get another spare room?
Well, as per my previous blogs, I have been saving for some time now, so that Lucy has a head start on the house deposit treadmill
The rest is up to her and the job market. Consistency of income will become a key facet of proving lendability (not sure if that’s a word). As the Gig economy becomes a more fluid part of incomes, lenders will need to embrace structural changes.
The historic reliance on Guarantors will become more difficult, as parents are often mortgage holders later into life and more often into their own retirements.
Renting will increasingly hinder her ability to save, so implementing a short-term saving strategy is acute, as will be giving her more flexibility to live at home and save
Utilising Government sponsored footholds will be necessary (Help to Buy or Equity Loan scheme and Shared Ownership)
We will need more Government and House Builder innovation to help First Time Buyers, because without new homes and new home owners, the housing market could become a stagnant pond