House price rises of 5% a year and a shortage of affordable homes are set to swell the ranks of “generation rent” over the next decade, so that by 2025 more than half of those under 40 will be living in properties owned by private landlords.
A report from economists at accountancy firm PwC suggests the number of new homebuyers is set to fall over the next 10 years, as the high cost of raising a deposit locks large segments of society out of the housing market.
Levels of homeownership have gone into reverse after years of increases that were stoked by Margaret Thatcher’s right-to-buy policy and the deregulation of the mortgage-lending business,.
The PwC report suggests this trend will continue. By 2025, a quarter of all households will privately rent, they predict, with the biggest increase among those aged between 20 and 39, where “ a clear majority” will be private tenants within 10 years
Renting privately is now the norm, the report says, for those who cannot afford to buy but do not qualify for social housing. By 2025, PwC predicts that 7.2m households will be in rented accommodation, compared with 5.4m today and just 2.3m in 2001. Despite government efforts to help homebuyers, the number of households buying with mortgages will have fallen by 0.8 million to 7.2m over the same period.
The report underlines the growing divide between those who can get on to the housing ladder and those who are unable to raise the funds to buy. “House purchases have historically been a major factor in driving wealth accumulation of lower and middle classes,” it said. “The inability of many to get on the ladder may limit this avenue to social mobility in the future.”
Those already in the property market will continue to cash in as prices rise. The PWC report says that 35% of homes will be owned outright, without a mortgage, by 2025. In 1995, just 24% of homes were owned outright.
Home ownership levels hit a peak in 2003, when 71% of homes in England were owned outright or with a mortgage. It had been on an upward curve since the early 1980s, when Thatcher gave council tenants the right to buy their homes, and the liberalisation of the financial sector made mortgages more easily available.
In the early 2000s, the advent of 100% mortgages and more relaxed lending criteria allowed buyers to keep up with rising prices, but affordability problems started to bite as the market reached its peak. The downward trend in ownership that started just before the financial crash was fuelled by the credit crunch, which made banks and building societies less willing to lend.
Although first-time buyer numbers rose in 2014 – to just over 300,000 – the figure was well below the half a million a year previously regarded as normal. Research from the Council of Mortgage Lenders shows 71% of people born in 1970 were homeowners by the time they were 40, but among those born in 1990 the figure is likely to be just 47%.
According to PwC, those struggling to raise a deposit will continue to be thwarted by house price rises that outpace earnings growth. Although the rate of house price growth is set to fall back to 5% a year, the report said the average UK home would be worth around £360,000 by 2020, compared with £279,000 in 2015.
John Hawksworth, chief economist at PwC, said more homes were needed in the long term: “A large and sustained increase in affordable housing supply will be required to meet the needs of a UK population that is growing relatively rapidly by European standards.” He suggested policies to cap social rents, announced in the recent budget, could deter housing associations from investing heavily in building.
Hawksworth said moves to build more homes would not have an impact in the short term and plans to make buy-to-let investments less attractive to landlords were only likely to make a difference “at the margins”. He added: “The increase in renting wouldn’t be a problem if we had the levels of quality seen in countries like Germany.
“The solution to this doesn’t have to be to get more owner-occupiers, it could be to improve the quality of rented homes and allow for longer tenancies so people have more security in that sector.”
Neal Hudson, housing market analyst at property firm Savills, said the barrier for current prospective homebuyers was not the cost of owning but the cost of buying. “With low mortgage rates, annual housing costs are more affordable than for those in the rented tenures,” he said. “Instead, with house prices still at many multiples of income and mortgage lending at high loan-to-values limited and expensive, it is the cost of raising a deposit that prevents many from buying a home.”
The director of the campaign group Generation Rent, Betsy Dillner, said high costs meant people in rented accommodation were struggling to save for the future. “As more low earners and retirees rent privately with no way to pay the rent, the taxpayer will pick up the tab,” she said. “The government needs to have a plan B: to invest directly in housebuilding and reform renting to make it a genuine long-term alternative to home ownership. The longer they fail to act, the more renters they’ll have to answer to.”
The long-term effect of the movement away from home ownership was highlighted in a recent report for the Chartered Institute of Housing, which found that in 35 years’ time a third of people aged over 60 will live in rented accommodation.
David Beattie, managing director at pensions firm Aegon UK, said this could cause problems for future retirees. “Should homeowners need it, they can release the equity to fund their retirement or top up their income.” he said. “It was once a given that by the time people retired many would own their own home. However, as levels of home ownership tail off, more and more people do not have the luxury of a property safety net.”
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