“Did the pandemic just kick the UK Property Ladder from under us?”
Housing is a basic life necessity in any civilised society. The aspiration, importance and challenge of homeownership have always been a topic that resonates deeply with people in the UK (in other European countries, the desire for homeownership is not as prevalent, for instance in Germany, where there are more home renters than homeowners). However, in the UK, attitudes regarding homeownership are clear — A first-time buyers survey in 2016 showed that 77% of people would prefer to own their own home in the long term.
The Property Ladder before the Pandemic
It was already difficult enough to make that first step onto the property ladder. Young people are confronted by a number of significant economic obstacles, which have made homeownership a distant dream for a whole generation. Studies have shown that those born in the late 1980s are nearly half as likely to be a homeowner by 27 as those born just 10 years earlier.
The primary reason for this has been the rapid decoupling of house prices and incomes. After adjusting the figures for inflation, average house prices were found to be 152% higher in 2016 than they were just two decades prior. Meanwhile, the real net family incomes of those aged between 25–34 only grew by 22% over the same time period. Further compounding the situation, the stringent lending criteria introduced at the tail end of the 2008 financial crisis had caused the size of the average mortgage deposit to increase to £33,000. As a result, even those with relatively high salaries have found it difficult to climb onto the property ladder.
And Now… the Property Ladder During (and Post) the Pandemic
Whilst the health risks posed by Coronavirus are disproportionately faced by older people, the burden of the economic impact is largely felt by younger people.
Young people are more likely to be employed in parts of the economy which will have been partially or completely shut down due to social distancing measures. These include sectors like retail, hospitality and travel. At best, this will mean dealing with an insecure financial situation, and in the worst cases, it will result in unemployment. This uncertainty will greatly impact the ability of a young person to save up for a deposit and could clearly impact their ability to meet the affordability criteria of mortgage lenders.
Unfortunately, there is more bad news, with lenders now insisting on a higher deposit of 15% of the loan to value as eligibility criteria for a mortgage. In London, where the average price of a 2 bedroom is as high as £475,000, this 15% deposit amounts to £77,000 to secure an 85% mortgage. At the height of the lockdown imposed by the government to curtail the spread of the virus, many banks pulled more than half of their mortgage products that made it possible for first-time buyers to get their foot on the ladder. Home loan applications were down, as a result, by 53% between March — April this year. With many prospective buyers on furlough, lenders are also asking for confirmation from employers that they will be going back to work eventually.
Covid-19 has, for the time being, inevitably reduced the incentive for homeownership as a key part of financial planning. Young people are more inclined to rent for the short to medium term whilst both theirs and the nation’s finances recover. However, it is still worth talking about the opportunities that may arise from what may seem like a hopeless situation. Homeownership remains a medium to long-term ambition for the millennial, and so it’s worth just pointing out the ray of sunshine that may still be seen through the clouds!
The UK government has announced its commitment to introduce policies to support the housing market, starting with the reduced rate of stamp duty announced by the Chancellor in his summer statement on July 8th, 2020. If you purchase a residential property between 8th July 2020 to 31st March 2021, you only start to pay Stamp Duty Land Tax on the amount that you pay for the property above £500,000. These rates apply whether you are buying your first home or have owned property before.
An illustration of the saving that would result from this new SDLT exemption is as follows:
· Purchase price: £445,000
· 15 per cent deposit: £66,750
· Mortgage: approx £1,706pcm
· Stamp duty saving: £7,250
A number of larger housing projects will possibly be fast-tracked by the government to boost the economy, so there will also be more residential supply hitting the market.
There is also the option of shared ownership whereby you buy between 25% and 75% in a property from a Housing Association and the Housing Association will own the remaining share. You will be required to pay rent on the share retained by the Housing Association but this rent will be index-linked.
The aftermath of the spread of the coronavirus has seen increased interest in living outside London to provide outside space and with the new normal of working from home meaning less commuting. It may be time to cast your net wider than the obvious cities and look for attractive suburbs which will have cheaper properties.
The economic shock experienced has been felt by all, both buyers and sellers. If you are someone with savings or an income that allows you to go shopping for that first property now, there will probably be opportunities to negotiate a reasonable discount and with less competition from other would-be buyers.
One thing is vital, you will need to do your research both on finding the right property and on financing your purchase. Also, make sure that you get proper financial and legal advice before you seal the deal. GOOD LUCK !!
For further reading: The Times, Money Mentor: Guide to buying your first home