“Households can no longer simply age their way to affordability” —
Resolution Foundation, The housing headwind report
Think tank the Resolution Foundation released a report on housing affordability in the UK on Tuesday and the results are depressing pretty much across the board. Home ownership is at a 30-year-low, and housing is eating up a growing proportion of income.
But, while the report makes for tough reading for everyone, there is particularly bad news for young people just starting out at the bottom of the ladder, renting while they try to save to buy a place.
Resolution Foundation found that there has been a fundamental shift in the way the housing market works. In the past, the main factor that determined whether you could afford to buy a house was age. Now, Resolution says, it’s where you’re already living.
Let’s unpack that.
20 years ago, the established route to getting on the property ladder was this: you rented until you’d saved up enough to put down a deposit on a property. How long it took you to save depended on how quickly you could climb the career ladder, interest rates, and how quickly house prices were rising. But broadly, you could do it.
Now that’s not the case. Rising rent costs mean “private renters consistently spend a higher proportion of their incomes on housing than any other tenure group, with significant implications for both their immediate living standards and longer term prospects.”
Rents are eating up more and more of people’s wages across age brackets meaning that whatever age you are at, if you’re renting you’re going to struggle to save.
Not only that, but spiralling house prices mean the goal is getting further and further out of reach even if you are saving. Imagine somebody inching the finish line of a race further away as you approach it. (I wrote more on this Catch 22 for first-time buyers here.)
The below chart from Resolution Foundation neatly illustrates the problem — note how the median house price and advance (deposit) needed to get a property became completely uncoupled from growth in income around 2002.
Resolution Foundation concludes that “households can no longer rely on the passage of time to automatically reduce their HCIR [housing cost to income ratio].” Your pay won’t rise faster than housing costs as you get older. You’re just treading water.
As a result, “the route out of renting and into home ownership has become less common over the same period.”
So how do first-time buyers get on the ladder? It seems the most likely way now is to try and live with your parents — rent free ideally, subsidised rent if not — until you’ve saved up. Or just be rich.
This is a serious issue. The report says:
“Generation Rent is growing up — and critically is having children. As a result, 1.6 million households with children now live in private rented accommodation, compared to 690,000 a decade ago. These families have different housing needs in terms of standards and security, and the private rented sector looks poorly placed to meet them.”
Britain’s rental sector wasn’t built to cope with families. It’s primarily cheap and cheerful flats to be shared by multiple people. It’s designed for the old way of doing things — young people saving for a house — not the new reality.
“Renting in the private sector is no longer the preserve of young people who prize the flexibility and the choices it gives them,” Resolution says. The problem is the housing supply hasn’t kept up with the changing market.
Not only is the rental supply unsuitable for a growing number of people forced to live there, rising rents and house prices mean that: “When we include housing costs in our wider consideration of living standards we find over half of households across the working age population have seen falling or flat living standards since 2002,” the report says.
The reason it feels like you’re treading water when it comes to the money you’re making is because your stupid house or flat is eating up more and more of your cash. And if it’s a rental property, the chances are it’s going to stay that way.
This is not just a London problem. Resolution Foundation says:
“It is wrong to see housing as a living standards challenge only in the South of England. Indeed, we see the North and South converging on some, if not all, affordability measures, with households in parts of the North now having a housing cost to income ratio approaching that witnessed in London two decades ago.”
If Theresa May wants to tackle increasing income inequality in the UK, it looks like she should make housing a top priority. You can read the full Resolution Foundation report here.