Why is owning a home unaffordable for an increasing proportion of young adults? The answer might seem obvious: thanks to rampant price inflation, houses are too expensive.
Except that’s not quite true. Houses are indeed expensive – and always will be. Leaving aside the cost of land, the cost of materials and labour is such that houses are typically worth many times an average annual salary. Most aspiring home owners don’t have that sort of money on hand, which is why they need someone else to give them the necessary capital – or, more likely, lend it to them.
All other things being equal (such as job security) any collapse in home ownership among potential first time buyers should, in the first instance, be explained in terms of access to finance.
This is the approach taken by the economist Ian Mulheirn – who is emerging as a constructively contrarian voice in the debate over the housing crisis. Blogging on the issue he begins with a summary of the UK situation:
“Last week the IFS produced a report that… documents how the home ownership rate among UK-born 25-to-34 year old dropped dramatically from a peak of about 58% in 2002 to around 39% in 2016. The authors pin the blame squarely on rising house prices relative to incomes, citing a 152% increase in real house prices in the 20 years after 1995–96 compared to a meager 22% real terms rise in household incomes for young people.”
However, he then goes on to point out that “three quarters of the fall in home ownership occured after house prices had begun to fall. He also says that the (declining) trends in home ownership in each region of the UK were similar despite dissimilar house price trends. The implication is that the proximate cause for the collapse in home ownership has to be something that (a) happened after the financial crash and (b) was pretty uniform across the country.
Mulheirn has a prime suspect – credit conditions, in particular access to mortgage finance:
“A look at first-time buyer mortgage data tells a much more compelling story for why home ownership rates collapsed… in the five years up to 2007 the issuance of [first time buyer] mortgages was pretty constant at around 370,000 per year. In 2008 that number suddenly almost halved, to 192,000, and didn’t really recover for the next six years.”
Mulheirn’s conclusion is that you can’t have high home ownership rates without easier access to finance – the risks of which leave policymakers with two options. Here’s the first:
“Privatise the risk again… end the limits on high loan-to-income loans, and relax mortgage affordability tests…”
That might do the trick… but it might also cause the next financial crisis. Thus we turn to second option:
“Publicly subsidise the risk (more). If you’re not too impressed with the private sector’s risk-management track record of late, an alternative way to raise home ownership would be to use taxpayers’ money to subsidise it.”
This is exactly what the UK government is doing with its Help to Buy policy – effectively a subsidy for first time buyers – which, in Mulheirn’s opinion, has “almost certainly helped to break the fall in home ownership.” However, in doing so, it has helped sustain a renewed burst of house price inflation to the primary benefit of speculators.
Having identified the flaws in the options one and two, Mulheirn has a third – which is to give up:
” If neither of the above seem acceptable, then we may have to acknowledge that the 71% home ownership rate of the early 2000s is a thing of the past and accept that something nearer the current 63% is here to stay.”
71% to 63% doesn’t seem too big a drop – but there’s no guarantee it won’t resume its decline once the cooling effect of Brexit on property speculation wears off. Also, as made clear by the IFS figures, the drop we’ve seen so far is heavily concentrated on 25-34 yrs olds – an age group for which time is running out. After the age of forty it becomes progressively harder for assetless first time buyers to get a mortgage; because you need enough years of working life left to pay it off.
We therefore need further options. What those might be we’ll explore in a forthcoming UnHerd series on the housing crisis.