The Young Generation and the Vicious Cycle Called The... Rent Trap
One of the most important (and possibly the largest) transactions most people will make is the purchase of a home. Yet for millions of first-time buyers in the UK, the prospect of owning a home remains a distant dream. Rising house prices, the necessity for a substantial deposit, and the difficulty in meeting affordability criteria (as average incomes remain stagnant) all mean that purchasing a home is out of reach. This leads to a vicious cycle where, by the time sufficient funds have been saved towards a deposit, property prices have increased so much, that a larger deposit is required. As rents and other costs also increase, trying to put away more towards this seems impossible. Searching and choosing the ideal property can be a lengthy and emotional journey and, even for those who are able to fund the purchase, it can be massively frustrating after having finally made an offer only to find that someone else has offered more. In fact, a government report estimates that a quarter of failed property transactions incur wasted costs in excess of £1,000 further deterring potential buyers.
Those lucky enough to have parents who can either support their mortgage application by providing security or by borrowing against their own homes, often find that this is the only way they can get onto the property ladder. Yet this is not a route that most people can take, and some will feel that it is paradoxical that this critical step towards independence requires one to be further indebted to the bank of mum and dad.
One option which may help first-time buyers get onto the property ladder is a fifty-year home loan. Although people may not wish to tie themselves into a position where they take on long-term debt (potentially for the rest of their lives), it may be the only viable alternative to long-term renting. Lenders considering offering this product note that currently, buyers can borrow at between 3 and 3.5 times their income and that their current suite of mortgage products offers terms of 30 years on average. A fifty-year loan would allow borrowers to draw up to eight times of their income and would allow them to spread the repayments over a much more manageable time frame. It would also enable buyers to plan better, with the potential to structure payments over the life of the loan based on their predicted levels of income and expenditure.
However, David Alexander the chief executive of DJ Alexander Scotland has warned that longer-term mortgages are not the solution to the housing affordability crisis. On the contrary, he feels that, should such mortgages be launched, they would result in further inflation of property prices and in the longer term result in debt being transferred to the next generation. In his opinion, property prices are primarily determined by demand. The insufficient housing stock in the UK means there is a high demand for available housing and the only way to “fix” this is with a comprehensive plan to encourage more homebuilding.
Successive governments have struggled to find a viable solution and it seems that ‘generation rent’ may be here to stay unless addressing this issue becomes an urgent priority.