The Property Ladder

Will Your Children Ever Own a Home?

A recent report from the Resolution Foundation stated that one in three of Britain’s millennial generation will never own their own home, so it seems the challenges young adults face in the real estate sector are as real as ever.

By comparison, the report stated “in 2003, the number of children in owner-occupied housing outnumbered those in the private rented sector by eight to one. That ratio has now fallen to two to one.” This suggests that public policy over the last 15 years has failed to keep up with volatile changes in the property renting market. But is it all doom and gloom for 20-35 year olds seeking security in real estate? How does this look moving forward?

What Are Millennials Currently Facing?

Over the past 35 years, the proportion of 25-34 year olds that own their own home has halved in many regions in the UK. Thus, it wouldn’t be fair to say that the issue of property ownership for young adults is limited to just London. There are calls for rent control and a cap on rent increases, although this doesn’t necessarily tackle the problem at hand. In the UK’s capital, however, it is especially difficult: a study produced by Britain’s Institute for Fiscal Studies has shown that despite the city’s median salary clocking in at ￡34,000 per annum, the average cost of a deposit for a property in London sits at around ￡90,000, and that excludes the cost of a loan to sustain home ownership. So even for hard-working young professionals, the housing challenge faced remains vast, and offers little hope for millennials looking to bolster their financial security through asset ownership.

Troubleshooting Solutions

It’s not as though the UK government hasn’t tried to troubleshoot this issue: they recently cut the sales tax levied on housing (although this shift in policy has received criticism for the likelihood that this will only increase house prices overall) and there is also talk of the government eradicating planning restrictions that hinder the construction of new homes, but largely British politics has been hard pressed in finding any real solutions. And hopefully by now we’ve all realised the suggestion of shifting consumer habits is not going to cut it; it is not fair to say that it’s the millennials’ inclination towards “avocado toast and lattes” is holding them back from the real estate property ladder; the problem, and thus the solution, exists on a much grander scale.

One option designed to circumnavigate this issue is the Help-to-Buy scheme. It is a government scheme that offers an equity loan where the government lends first-time buyers funds to buy a newly-built home for up to ￡600,000. The way this works is fairly straightforward: you need at least 5% of the sale price of your new-build home to put down as a deposit. The government will lend you up to 20% of the sale price of the property, and you can then borrow the rest (up to 75%) from a mortgage lender on a repayment basis. For the first five years you pay no interest fees on the loan, in year six you pay 1.75% of the loan, and from the seventh year onwards you pay 1.75% + RPI + 1% of the loan. When the property is sold, or the mortgage is paid off, you need to repay the equity loan as well as a share of any increase in the value. With general home ownership in free fall from across the regions for ages 25-35 since 1998, the initiative can only be a good thing who's time has come.

More Houses Need to be Built

But the Help-to-Buy scheme bears pros and cons. The pros are obvious: it helps millennials with a limited income buy a home sooner, with a smaller deposit, and the chance to borrow interest free for five years. One such drawback of the scheme is that despite the interest free five years, after that the loan becomes increasingly expensive. When you hit the seventh year, your loan can increase exponentially, as the rate of interest applied rises. This becomes more apparent when you consider the possibility of RPI shooting up, which will in turn drastically increase repayment fees. Moreover, the amount you will end up needing to repay on your Help-to-Buy equity loan isn’t fixed. It is percentage-based, meaning it will fluctuate with the market value of the property. So, if the house rises in value, the buyer will be eligible to pay much more than the sum originally borrowed. These backdoor expenses can significantly cripple homeowners, which is a genuine risk given the volatility of the financial and real estate sectors. Lastly, property experts have been claiming of late that the Help-to- Buy scheme is beginning to inflate house prices, and take out stock from affordable housing. They report that the scheme may creating a housing bubble and shortage that will burst when the initiative ends.

Help-to-Buy scheme is far from a gimmick. It is genuinely helpful for many first-time buyers and, by extension, millennials. However what is needed most, is housing that provides stock for this and many of the initiative being put in place. Without greater stock provided by SME house builders, prices will inflate, as supply remains low relative to what the country actually needs.

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Hauser-Oberschneider is an independent investment manager. Our company is dedicated to creating investment opportunities through secured asset-backed lending and equity investments for SME developers. We work with investors who may not have the time and resources to access direct real estate opportunities. Read our latest report MIND THE GAP.

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