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Millennials Loss in Home Ownership A Landlord’s Gain?

Home ownership, especially among the young, in the UK has declined significantly compared to a decade ago. As the name suggests, Generation Rent is growing, now more than ever before.

Today, 40% of young adults are unable to afford one of the cheapest homes in their area even with a 10% deposit.

For 25- to 34-year-olds earning between £22,200 and £30,600 per year, home ownership fell to just 27% in 2016 from 65% two decades ago. This is an indication of home ownership collapse over the past 20 years especially among those from the middle-income range.

Back in 2016, data by the Office for National Statistics had highlighted that the number of homeowners in the 22- to 29-year-old age group stood at 37% in 2008 compared to just 27% over the last 10 years. This drop in homeownership among young adults has several contributing factors.

The drop in homeownership among young adults. Image credit: IFS

Disparity in House Price Growth vs Income Growth

Rising house prices relative to income growth has robbed the younger generation of the ability to buy their own home, while the increase in rental rates has made it almost impossible to save for a deposit.

House prices have risen around 7 times faster compared to wages over the last two decades. New research by the Institute for Fiscal Studies (IFS) reveals that since 1997, the average property price has risen by 173% in England after adjusting for inflation, and by 253% in London. Meanwhile, rental cost has risen from an average of £140 a week to £200 a week in England.

The expanding disproportion between income rate and ever-growing house prices is resulting in a severe unaffordability crisis among young adults.

Income versus house price growth Source: IFS, Image Credit: The Sun

According to a report by the Sun, back in 1995/96, 2 in 3 (65%) of 25- to 34-year-olds from the middle-income bracket were homeowners.

But by 2015/16, the number plummeted to just 27% where only 1 out 4 of this group owned their own home.

At the time,  average house prices were a staggering 152% higher than they were 20 years earlier after adjusting for inflation. Meanwhile,  the nett family income of those aged 25-34 increased by only 22% over the same period, causing a relentless imbalance between household incomes and house price growth.

A Preference for Experience-focused Living

Another notable factor is the youngsters’ preference for an experience-focused living.

Millennials prefer living amongst a like-minded community. For many, renting a house enables them to live close to the city centre — which also happens to be where they prefer working — and be part of a community that possesses similar lifestyle practices. This aspect seems to have taken the priority seat compared to being able to buy a house.

Purchasing a property near the city centre is close to impossible due to exorbitant prices, hence, renting becomes the next best option.

An Opportunity for Investment

This drop in home ownership and high demand for rental properties amongst the millennials signifies a huge shift for the UK’s rental and investment sector, offering opportunities for investment returns. In Manchester alone, one of the fastest-growing cities in UK, an estimated 11,000 new jobs are forecasted to increase by 2022, yet only 4,000 new properties in the city centre are expected to be built by then.

The lack of supply in residential properties alongside growing job opportunities increases the demand for rental properties which, reciprocally, opens the gateway for investment. In September 2018, the UK government and Barclays Bank announced a new £1 billion loan fund to drive construction levels in the country’s property sector, with a focus on providing greater numbers of purpose-built rental property in key markets.

The ever-growing rental market promising capital growth and rental income clearly opens an array of investment opportunities for investors looking to spend their money wisely.

By Lydia Devadas 
Edited by Vivienne Pal

  • https://www.ifs.org.uk/uploads/publications/bns/BN224.pdf
  • https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/homeownershipdownandrentingupforfirsttimeinacentury/2015-06-19
  • https://www.bbc.com/news/business-45776289
  • https://www.theguardian.com/money/2018/apr/17/one-in-three-uk-millennials-will-never-own-a-home-report
  • csiprop.com/investors-can-look-forward-to-uk-rents-increase-of-15/
  • https://www.thesun.co.uk/money/5590859/one-in-four-middle-earners-own-home-ifs-report/
  • csiprop.com/manchester-top-10-in-the-world-for-fdi/
  • https://uk.reuters.com/article/uk-britain-housing-barclays/barclays-and-uk-government-launch-1-billion-pound-house-building-fund-idUKKCN1LR2P1
  • Image Source: https://www.huffingtonpost.co.uk/2014/05/01/shocking-uk-renting-facts_n_5246159.html

 

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UK’s Younger Generation Opt to Rent As Over-50s Dominate Property Market

The latest data from Savills looking at UK homeownership has revealed that the amount of the nation’s property wealth held by the older generation is on the rise, while youngsters are increasingly less likely to own a home.

It looks like the odds are stacked against UK’s younger population. Many are leaning towards alternative ownership schemes, and in most cases, are opting to abandon the idea of owning a house entirely, in favor of renting.

The latest data from Savills on UK homeownership revealed that the wealth generated from the nation’s property market and held by the older generation, is on the rise. Meanwhile, what seems to be increasing for the UK’s younger generation is how unlikely they are to own property. Recent statistics from the Institute for Fiscal Studies show that the 25 – 34-year-old age group are around half as likely to own a property now than they were 20 years ago.

A whopping 75% of housing wealth in Britain is held by the over-50s, with a meagre 6% belonging to the under-35s. Zooming in on more specific age groups, the over-65s currently dominate the housing market, holding 43% of the country’s real estate wealth.

The discrepancy in equity between varying age-groups is summarised below:

The latest data from Savills looking at UK homeownership has revealed that the amount of the nation’s property wealth held by the older generation is on the rise, while youngsters are increasingly less likely to own a home.

This illustrates the thinning group of homeowners in Britain’s younger generation.

A deeper analysis reveals that homeowners have piled up equity by living longer, paying off their mortgages and watching as prices grew steadily in the final decades of the last century. While the latter has proven to greatly benefit the older generation, it has become quite the game changer for young, first-time home buyers.

First-time Home Buyers: The Discrepancy Between Average Income & Deposit

First-time home buyers are finding that complete homeownership is moving further out of reach as average annual income currently struggles to keep up with skyrocketing house prices. House prices are now 5.2 times higher than the average income, while in London, it’s a staggering 14 times higher!

In most regions, it takes the average first-time buyer about eight years to save for the deposit needed to buy a home. This rises to nine years in the southeast and 11 years in London. The typical deposit required to purchase a one-bedroom or studio apartment in London is £77,407, and £112,555 for a three-bedroom home. Meanwhile, the median income of a first-time buyer in London averages at £66,111. The stark reality is, many are unable to save such a sum and over a third reported that a proportion of their savings came from a gift or loan from family or friends.

UK’s Younger Generation Look Towards Renting and Partial Homeownership

UK’s younger population is currently looking towards alternative ownership schemes, and in most cases, opting to abandon the idea of owning a house entirely, in favor of renting.

The alternative scheme referred to is shared ownership, whereby buyers have the opportunity to purchase a percentage share of a property between 25% and 75% of the home’s full market value, paying a subsidised rent on the remaining share. Buyers can then choose to purchase additional shares as and when they can afford to, known as staircasing, allowing them to ultimately own their home outright.

Renting, on the other hand,  has been gaining momentum, with a considerable number of people turning towards it by choice. A research conducted by AXA revealed that less than 50% of its research participants are renting because they cannot afford to buy their own homes. The research also revealed that many enjoy the freedom of not being tied down by a hefty mortgage!

Conclusion: Renting is the Way to Go 

While UK’s older generation is predicted to continue benefiting from house price growth, the future is also welcoming a new wave of young renters. More people are choosing renting as a lifestyle option, particularly young professionals who enjoy the flexibility of renting, whilst being mortgage-free.

Jamie, a Business Manager for a Health GP Company in Northumberland, has a positive viewpoint of the evolving property market in the UK: “I have no issues with (renting). There is, to a degree, temporised value; you can often live in a nicer area, nicer street etc. for a cheaper monthly payment than a mortgage payment. Some see renting as ‘throwing money down the drain’, but I see it differently. Renting allows you to become, in some odd regard, a more static member of the travelling community,” he says.

Britain seems to be transforming into a nation of renters, which only adds to the appeal of property investment. For more information on this, click the following link: https://csiprop.com/britain-a-nation-of-renters/. If you are interested in investing in UK property, do contact us!

By Nimue Wafiya

Sources:


CSI Prop proudly promotes international investment property with high yields at low risk. Our portfolio comprises residential and purpose-built student property in cities across the United Kingdom (London, Luton, Manchester, Liverpool, Newcastle, York, Glasgow, Scotland; Sheffield, etc); Australia (Melbourne, Perth, Brisbane) and Thailand (Bangkok). Our projects are concentrated in high-growth areas with great educational, infrastructural and job growth potentials. We aspire to make a difference in the lives of our clients by helping them achieve their investment goals through strong market research backed by third party experts and due diligence. 

Disclaimer: CSI Prop does not provide tax & legal advice and accepts no liability. Readers are encouraged to consult a qualified tax or legal advisor for a thorough review.

Need advice or clarification? Call us for more information and/or to find out about our projects! Hotline: 03-2162 2260

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Britain, a Nation of Renters?

Image credit: http://bit.ly/2eThsCC

Home ownership across England was at its peak in April 2003, when 71% of households owned their homes, but the figure fell to 64% by February this year, according to a new report by the Resolution Foundation thinktank. The report also shows a big slump in home ownership in Greater Manchester and cities in Yorkshire and the West Midlands. This figure is the lowest since 1986, when home ownership levels were on the way up as a result of policies introduced by the Thatcher administration.

Today, the UK is populated by a generation of renters, with the number of UK households renting property having risen from 2.3 million in 2001 to 5.4 million in 2014 according to the Royal Institution of Chartered Surveyors (Rics).

Here are 5 reasons why buy-to-let or rental property will remain crucial in the UK for some time to come:

Savills calculated the cost of buying vs renting a home. Image credit: http://on.ft.com/2eKm5kU

Reason #1: It’s about 20% cheaper to rent a home in the UK on a monthly basis than to buy (Savills)

Renting a home used to be 25% more expensive than owning back in 1996, but in 2007, it became 79% cheaper to rent than buy your own.  When the costs of capital repayments on a mortgage in Year 1 are factored in, costs rise and renting becomes significantly cheaper than buying on a month-to-month basis. In order for a first-time buyer’s monthly costs to be lower than the costs of renting, the purchaser would require, on average, a deposit of at least 39% of the value of the property, according to Savills’ calculations.

Growth in house prices vs wages in the UK as at Jan 2016: While UK house prices increased by 7.9% last year, figures from ONS show that the UK median wage increased by just 1.8%. This suggests that house prices are growing more than four times as fast as median wages. Source: ONS. Image credit: http://bit.ly/1SjLa5f

Reason #2: House prices too high in proportion to wage growth

Despite recent figures from mortgage lenders showing an increase in the number of loans taken out for house purchases (possibly due to low interest rates), the number of homes for sale is close to a record low, and prices continue rising.

A typical home in the UK now costs six times average annual earnings despite slowing house price inflation. According to Nationwide, house prices have risen by 20% over the last three years while wages rose by just 6%.  Meanwhile, prices in the capital are 9.2 times average earnings, while the Royal Institution of Chartered Surveyors (Rics) said 22% more surveyors in London expect sales to fall over the next three months. The last time prices/earnings ratio was so high was in March 2008. A ratio of 4.5 times a borrower’s income is regarded as the maximum that banks and building societies will agree to lend.

Over in Greater Manchester, the proportion of home owners dropped from 72% in April 2003 to 58% this year. According to financial analyst Louise Cooper, the average house price in England in 1986 was £38,000 but today it is £226,000 (Rightmove’s latest report on average asking prices for a home in England and Wales in October 2016 now stands at £309,122). And that over the same period, the average salary had only gone up 2.5 times. “Everyone says it is a London problem. It is not,” said Cooper.

Renting privately is now the norm, according to a PwC report, 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. Source: PwC. Image credit: Guardian http://bit.ly/2eTdslz

Reason #3: Private rented sector – biggest provider of rented homes

The private rented sector has taken over from councils and housing associations as the biggest provider of rented homes with prices paid by tenants in Britain increasing by 2.3% in the 12 months to Sept 2016, according to latest official data. The number of households renting from a private landlords stands at 4 million while the number of those renting from a council or housing association stands at 3.7 million. Statistics peg the number of renters in the UK at 5.4 million as at 2014, but Rics predicts that at least 1.8 million more households will be looking to rent rather than buy a home by 2025. An analysis published last year by PwC suggests that 7.2 million households will be in rented accommodation by 2025 compared with 5.4 million in 2015 and 2.3 million in 2001.

According to the English Housing Survey, four in 10 renters in the growing private rented sector do not expect to ever buy a house and of those who do, 44% expect to wait more than five years before they can afford it.

House building has abysmally failed to keep pace with Britain’s population explosion, a crisis that was further exacerbated following the financial crisis that induced a slump in house building as the graph shows the UK annual population change against annual new housing build completions. Data source: ONS. Image source: Market Oracle http://bit.ly/2fBK9Wc

Reason #4: The UK has an undersupply of housing

It is an old refrain, but the UK is facing a critical undersupply of housing even up till today. In late 2015, the BBC published an incriminating article on the shortage of housing in the UK, citing the Labour government’s failure to build 240,000 homes by 2016 — a target set in 2007. The Barker Review of Housing Supply had noted in 2005 that about 250,000 homes needed to be built every year to prevent spiralling house prices and a shortage of affordable homes. The closest the UK got to hitting the target was in 2006/07 when 219,000 homes were built. During the EU Referendum campaign, Brexit-backer Iain Duncan Smith said the UK would need to build 240 houses a day for 20 years to cope with increased demand, a claim that has been substantiated by the BBC. And the consequence of undersupply and high demand? Skyrocketing prices. With house prices at unaffordable rates, the only other option would be to rent.

Trivia 1: #DidYouKnow that for decades after WWII, the UK used to build more than 300,000 new homes a year? Now it’s about half that amount.

Trivia 2: In May 2014, BoE governor Mark Carney complained that housebuilding in the UK was half that of his native Canada despite the UK’s population being twice its size.

Home ownership is clearly declining among those within the younger age group. This is caused by a number of reasons including affordability and, increasingly, preference (lifestyle).

Reason #5: Lifestyle – the increasing preference for renting vs buying

While for some it is an economic choice, more are choosing to rent their homes over buying due to lifestyle. This shift is being prompted by younger workers today, also known as the Gen-Y demographic who are setting down later in life and changing jobs and careers with more regularity than their parents. This generation are marrying and having children later in life, allowing them the freedom to move as they want and when they want.

A research conducted by AXA discovered that less than 50% of the research participants are renting because they cannot afford it compared to the 67% in a study performed in 2013. The research revealed that many enjoy the freedom and flexibility of being mortgage-free. Thus the idea of being tied down to a mortgage and a single location is preventative for a workforce that wants to remain transient.

Conclusion

Owning property for rental in the UK is a good investment. It is important, however, to be aware of the costs involved and to be prudent about where you should invest in buy-to-let in order to maximise your returns.

CSI Prop proudly promotes international investment property with high yields at low risk. Our portfolio comprises residential and purpose-built student property in cities across the United Kingdom (London, Luton, Manchester, Liverpool, Newcastle, York, Glasgow, Scotland; Sheffield, etc); Australia (Melbourne, Perth, Brisbane) and Thailand (Bangkok). Our projects are concentrated in high-growth areas with great educational, infrastructural and job growth potentials. We aspire to make a difference in the lives of our clients by helping them achieve their investment goals through strong market research backed by third party experts and due diligence. 

Disclaimer: CSI Prop does not provide tax & legal advice and accepts no liability. Readers are encouraged to consult a qualified tax or legal advisor for a thorough review.

Need advice or clarification? Call us for more information and/or to find out about our projects! Hotline: 03-2162 2260