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Younger buyers struggle to get on the housing ladder

Monday 19 February 2018

Middle-class millennials are half as likely to own their own home as they were 20 years ago, new research has found.

A report by the Institute for Fiscal Studies, which looked at the decline of homeownership among young adults, found that just a quarter of middle-income earners now own their own home, down from two in three in the 1990s.

The findings revealed that today’s young adults are significantly less likely to own a home than those born only five or ten years earlier. Of those born in the late 1980s, 25 per cent owned their own home by the age of 27, compared to 33 per cent for those born five years earlier (in the early 1980s) and 43 per cent for those born ten years earlier (in the late 1970s).

The decline is geographically widespread, and whilst it has fallen furthest in the South East, plummeting from 64 per cent to 32 per cent, ownership has also dropped by at least 10 per cent in every other region and nation in Britain. 

The key reason for the decline points towards the sharp rise in house prices relative to the average income. Mean house prices were 152 per cent higher in 2015–16 than in 1995–96 rising from £79,000 to £198,000 after adjusting for inflation. By contrast, net family incomes of those aged 25–34 grew by only 22 per cent over the same twenty years. As a result, the median ratio between the average house price and annual income doubled from four to eight.

This increase in house prices relative to family incomes fully explains the fall in homeownership for young adults. The likelihood of a young adult owning their own home given how their income compares with house prices in their region is little changed from twenty years ago. But in 2015–16 almost 90 per cent of 25 to 34-year-olds faced average regional house prices of at least four times their annual after-tax income, and just under 40 per cent encountered house prices of more than 10 times their income, compared with less than half twenty years earlier. 

The report also found that young adults from more advantaged backgrounds are significantly more likely to own their own home. Between 2014–17, 30 per cent of 25 to 34-year-olds whose parents were in a low occupational class (e.g. delivery drivers or sales assistants) owned their home, compared with 43 per cent of those whose parents were in a high occupational class (e.g. lawyers, teachers or estate agents). However, after controlling for differences in observable characteristics of young adults such as their earnings and education, the homeownership gap between those from high and low socio-economic backgrounds is much smaller, at around three per cent.

Andrew Hood, a Senior Research Economist at the IFS and an author of the report, said: “Homeownership among young adults has collapsed over the past twenty years, particularly for those on middle incomes – for that group, their chances of owning their own home have fallen from two in three in the mid-1990s to just one in four today. The reason for this is that house prices have risen around seven times faster in real terms than the incomes of young adults over the last two decades.”

The report comes amid mounting concern from within the Conservative Party that the Government is failing to build enough homes. But whilst Housing Minister Dominic Raab MP insists schemes such as Help to Buy and the removal of stamp duty for a large proportion of first-time buyers have helped people to buy their first home, Labour's Shadow Secretary of State for Housing, John Healey MP, is not convinced. He said: “This research should be a wake-up call for Conservative ministers. After almost eight years of failure on housing, the government is still failing to tackle the fundamental problems with our broken housing market.”

NAEA Propertymark Chief Executive, Mark Hayward commented: “We've had Help to Buy but it should really be named 'Help to Sell' as it has assisted builders rather than first-time buyers. The lack of housing supply has also seen young people paying higher levels of rent, which prevents them from saving for a deposit. Those who can't afford family homes are choosing to rent larger houses rather than buy somewhere smaller, and our own research shows young people are now spending an average total of £50,000 on rent before they can buy.”