House prices, we discovered this week, have been rising at their fastest rate for seven years. For those of us who own our own homes, and especially for the older ones among us who own them outright, such news tends to provoke a sort of schizoid response. There’s the rubbing of hands: look at how much wealthier we are than we were just a couple of years ago, never mind five or ten. But there’s also a sense of guilt, mixed perhaps with alarm: it’s fine to be so much richer, but rising property prices are putting home ownership even further beyond the reach of the young. That’s not fair and maybe one day they’ll find a way of taking their revenge. As for the young themselves, it would seem that for many the idea of owning their own place has been a pipedream for so long that it doesn’t make much difference that it has just become even more unrealistic: house prices may unduly preoccupy their parents but it’s irrelevant to their own lives. Yet home ownership has been central to the cultural, economic and political life of Britain for generations. It has even provided a definition of ourselves as ‘a property-owning democracy’. Is this coming to an end? And would it be a good or bad thing if it did?
The latest figures show house prices rising at an annual rate of 10.9%. The average price of a home in Britain is now just shy of £243,000, up £24,000 over the last year alone. It’s gone up 50% in the last eight years. Back in 1983 the average price of a home was 3.4 times the average salary; now it’s 6.3 times. No wonder young people can’t afford to get on the property ladder, or at least not unless they can tap their parents or inherit some dosh from a doting grandparent.
Some of the recent spurt in house prices is due to temporary factors. Covid has increased demand by driving many people to move house so they can live in larger properties or in less congested areas. The amassing of a bit of extra saving through the non-spending lockdown has given them a bit more to put down on their new homes. And the government, responding to economists’ forecasts that Covid would create a slump in the property market (how economists love getting things wrong), provided a stamp duty holiday, extended to the end of this month, to try to keep it buoyant. Oh boy, it’s buoyant.
But these are just recent factors. The massive increase in the relative cost of houses over the last ten years or so can be explained by the most basic of economic laws: the law of supply and demand. If demand exceeds supply, then prices will go up. And in housing, demand has exceeded supply spectacularly.
Partly this is due to our changing habits as we all, on average, have become richer. The pertinent change here is the increasing preference of people to live alone. The case of a friend of mine illustrates the point. He lives in a typical north London three-bedroomed Victorian terraced house on to which he has built a spacious garden extension his mates mockingly call ‘the Village Hall’. And he lives there alone. Recently a bloke rang his doorbell, apologised for disturbing him but explained that he was curious: he had lived there as a child in the 1960s and wanted to know how the old house now looked. “Yeah,” he said, “it’s very different. There were ten of us living here back then… .” If more of us want to monopolise homes just for ourselves, then that means an increased demand for houses and upward pressure on prices.
But there’s another demand pressure that’s been having a massive effect in recent years and it goes back to that other event most economists failed to foresee: the financial crash of 2008. In its aftermath, central banks flooded our economies with cheap money (via record and sustained low interest rates and quantitative easing) in order to fend off a feared depression. It worked. But all that extra money, later enhanced be even more money thrown at the economy during the Covid lockdown, had to go somewhere and much of it has gone into the property market. Banks have been very happy, indeed desperate, to lend the new money the Bank of England has dumped in their coffers to anyone remotely solvent. Who better than people who have homes they already own to offer as security on the new loans and who fancy using the borrowed money for getting into ‘buy-to-let’? These ‘second-home owners’ have greatly contributed to the general rise in house prices.
Meanwhile, ‘supply’ has not kept up. The government may like to boast that 200,000 new homes were built last year, a higher figure than any other government had achieved for years. But its target was 300,000 and experts thought that was the minimum needed to slow down the rise in prices. Ministers hope their new proposed reforms to the planning system will see many more houses built (though whether their backbenchers will let them do it remains to be seen and is likely to provide one of the fiercest political battles in the post-pandemic world). Meanwhile, the era of cheap money has no obvious end in sight, so the combination of sticky supply and super-lubricated demand looks set to keep pushing house prices up even after the temporary factors doing so have faded from memory.
That’s how we find ourselves in a world in which the average price of a home is £243,000 while the average annual wage is just short of £31,500. No wonder the young can’t buy and that we now talk routinely of ‘Generation Rent’. What’s more, it’s not as though the explosion of ‘buy-to-let’ among the older generation has led to cheaper rents for the younger. Far from it. It is now not uncommon where demand for rented accommodation is high, as in London, for young people to find themselves using up half of their post-tax income simply in rent. In such circumstances there’s no chance whatsoever of their being able to save up enough for a deposit on a mortgage, and there’s no point in even trying when the average house price is so far in excess of average income. So, rent it is: money down the drain.
What all this adds up to is, implicitly, a massive transfer of wealth from Generation Rent to earlier, already richer property-owning generations from baby-boomers like me onwards. And it isn’t even all implicit: they’re actually paying it to us in hard cash in the form of the rents we’re charging. Of course some of Generation Rent will get this transferred wealth ‘back’ through inheritance – indeed many of the parent generation that has got into buy-to-let has done so with the intention of eventually passing on these ‘second homes’ to their kids. But those among Generation Rent without any prospect of inheritance stand next to no chance of getting their ‘lost’ wealth back because it was only through getting on the property ladder they’d have had access to this wealth in the first place, and the ladder has been withdrawn.
So it’s not surprising that many in my generation feel a pang of guilt alongside the frisson of pleasure when we hear our homes are worth ten percent more than they were a year ago. But guilt requires repentance and it’s not very clear what we should do to repent. Give up our comfy homes?
Why has home ownership been so important to us? One reason may be that housing, our home, is our most basic need and so to own it means we have independent control over it. Another news item this week – that around 400,000 renters face being kicked out of their homes as the ban on eviction introduced at the beginning of lockdown came to an end on Tuesday – makes the point well enough. And even without the extreme sanction of eviction, the dependence that comes with renting feels to many a vulnerability. One of the reasons Margaret Thatcher was so keen on selling council houses (beyond the electoral advantage she spotted for her party) was that she was aware how many council tenants simply wanted to be shut of what they regarded as their serf-like relationship to local authority housing departments who called all the shots as though they were feudal landlords. Prior to the sales, you could expect all the front doors on a council estate to be the same colour; they certainly weren’t afterwards.
The other main reason is that home ownership has been regarded not just as a safe way to build up a wealth asset but, for many, as the only way. Given the lack of spare cash to invest in any other asset, converting ‘wasted’ rent into a tool of saving, via a mortgage, seemed a no-brainer.
But not everyone has gone the home ownership route. Germans, for example, have been far less enthusiastic. They don’t seem to think that renting is an affront to their sense of independence. With proper tenants’ rights to reduce their vulnerability, many see the advantages of renting -- in not having the hassle of upkeep, and in the greater nimbleness that not having to sell your home every time you want to move brings. And as for building up assets, Germans have been far more keen on investing in the productive economy through buying shares and bonds. And that’s better for the economy than burying money in unproductive bricks and mortar, they gently point out.
So, should we perhaps welcome the fact that the trend towards ever-greater home ownership should be going into reverse? Well, there are pros and cons but I don’t think it will be my wealth-padded generation that will take the decision. The key issue, surely, is how Generation Rent reacts to its being locked out of wealth-creation, and not just through home ownership being beyond its reach.
For the other routes are also more or less blocked. ‘Human capital’ (in the form of education) used to be free but Generation Rent now has to pay back the initial investment in it if they can ever earn enough money to pay off their student loans. Pension wealth is now something they merely read enviously about in histories of the post-war world. Final salary pension schemes are rarely going to be available to them; other sorts of pension look too measly for them to bother with, and in any case they don’t have any spare cash to invest in them. Who heard of a young person even giving any thought to a pension, let alone signing up for one? And now there’s home ownership blocked off too.
Meanwhile, they’re looking at the prospect that they’ll have to work longer and longer before the state will let them retire, and that they’ll have to pay more and more taxes to fund the burden of social care and health needs the increasing number of us older people will place on them.
It doesn’t look like a very good deal. So would it be very surprising if they looked at all the property wealth they’ve been ‘transferring’ to their parents’ generation and concluded: ‘I think we’ll have some of that, thank you’? And would it be surprising if a political party saw an advantage in championing their cause by saying that wealth had been travelling in the wrong direction for far too long, that it was time that it was much more equitably distributed, and that there should no longer by any shilly-shallying about taxing the main repository of that wealth, the bricks and mortar that constitute our homes?
It might be wise for the home-owning generations at least to acknowledge the pertinence of these questions next time we find ourselves gleefully greeting news of yet another hype in house prices. But it’s much more important that the young themselves confront this question. How strongly do they feel about being effectively barred from owning their own homes? And if the answer is very strongly indeed… what are they planning to do about it?
What’s your view? Do you think it matters that home ownership is now beyond the reach of many young people? Do rising house prices tend to put a smile on your face or a frown? And do you think we have been too reluctant to tax the wealth tied up in housing?
Let us know what you think
