As house prices continue to rise in the UK and with the average salary also growing (but at a slower rate) could this spell the end of home ownership for Millennials living in the UK?
Over the past two decades, house prices have risen continuously on average, as illustrated in the diagram below
Average house prices have increased from approximately £55,000 to £200,000 which could spell trouble for Millennials. House prices have increased yearly, on average, by 6.9% since 1980 and are likely to continue growing in the near future. However, there are several reasons which have caused the demand for houses to exceed supply, thus causing a rise in property prices:
Demand vs. Supply
- Demographic factors: currently the UK’s population is at around 64.1m and continues to growth at a rate of 0.6% per year. This means that, as the population surges, the demand for housing increases as more people require a place to live
- Low interest rates: as interest rates are currently at 0.25%, the cost of financing is cheaper which encourages people to borrow and take out mortgages. However, this consequently pushes up asset prices and further increases property prices
- Political factors: in order to fight rising house prices, the government has introduced a variety of schemes to help first-time buyers, such as Help to Buy. This scheme essentially allows an individual to take out a mortgage with a low deposit of 5% instead of the traditional 30%. Although this is meant to encourage home ownership, it has had a reverse effect, resulting in a surge in demand for already growing house prices, thus putting further pressure on property value
- Cultural factors: in the 19th century home ownership was only an option for the wealthy. Nonetheless, in recent years, the culture of home ownership has increased and has even had a herd effect, thus further increasing people’s desire to own their home
- Net migration: as depicted in the chart below, net migration has skyrocketed over the last two decades. As immigrants migrate to the UK, they push the demand for housing further. However, construction of housing cannot keep up with this increasing rate, thus supply is tightening
All these factors boost demand in one way or another, but supply continues to lag behind this constant pressure, therefore increasing house prices.
As shown in the chart above, house prices have inflated, but not in line with buyers’ incomes, thus increasing unaffordability.
The Next Step
Although the government has adopted many schemes to help combat this problem, the focus needs to be on the supply side now, not demand. Schemes such as Help to Buy, Mortgage guarantees, Right to Buy/Right to Acquire, Shared ownership all aim to help increase affordability but have an adverse impact on demand, not supply.
For this purpose, several possible solutions are available:
- Providing subsidies for home building companies would reduce the cost of construction, thus stimulating more projects. This could help increase supply and offset increasing demand
- Loosen housing policies: this way, more permits can be provided, which could, therefore, lead to a surge in housing construction
These policies could help counterattack the growing risk of Millennials not being able to join the housing ladder.