The cheapest local homes are out of reach for at least 40% of young adults

Michael Lloyd

October 9, 2018

Even the cheapest homes are out of reach for 40% of young adults, the Institute for Fiscal Studies has found.

After adjusting for inflation, average house prices in England have risen by 173% since 1997, compared with increases in young adults’ real incomes of only 19%. Largely as a result, the share of 25- to 34-year-olds who own their own home fell from 55% to 35% between 1997 and 2017.

Polly Simpson, a research economist at IFS and a co-author of the research, said: “Big increases in house prices compared to incomes over the last two decades mean that it is increasingly difficult for young adults to get on the housing ladder, even if they do manage to save a 10% deposit.

“Many young adults cannot borrow enough to buy a cheap home in their area, let alone an average-priced one. These trends have increased inequality between older and younger generations, and within the younger generation too.”

As long as they had a 10% deposit, in 1996 over 90% of 25- to 34-year-olds would have been able to purchase a house in their area if they borrowed four and a half times their salary (the maximum that most lenders will now allow).

By 2016, that proportion had fallen substantially. Even with a 10% deposit, only around 60% of young adults would have been able to borrow enough to buy even one of the cheapest homes in their area.

Barriers to homeownership are particularly high in London where – even with a 10% deposit – only one-in-three young adults could borrow enough to purchase one of the cheapest homes in their local area.

Back in 1996, if they had borrowed four a half times their salary, 90% of young adults in London could have done so.

Rising property prices relative to incomes have made it increasingly hard for young adults to raise a deposit.

In 2016, around half of young adults would have needed to save more than six months of their post-tax income to raise a 10% deposit on one of the cheapest properties in their area (their local authority), compared with just one in 10 in 1996.

To buy an average-priced home in their area, more than three-quarters of young adults would need a deposit worth six months’ income or more (up from one-third in 1996).

House prices differ a lot more around the country than do young adults’ incomes. This makes it much harder for young adults in London to buy than it is for those in other parts of England.

In London, 95% of young adults would need to save at least six months’ income for a 10% deposit on an average-priced home in their area. This compares with just over half in Yorkshire and the North East.

Planning restrictions, such as the Green Belt, prevent the construction of new homes in response to demand, particularly in London and the South East.

Easing planning restrictions would increase homeownership and reduce both property prices and rents.

Jonathan Cribb, a senior research economist at IFS and co-author of the research, said:  “The most economically productive and wealthiest parts of England – London and the South East – are those with the most restrictive planning constraints.

“It is unsurprising that these areas have also experienced the biggest house price increases. Increasing the responsiveness of construction to house prices is a necessary part of the solution, particularly in these areas.

“Unlike other policy alternatives, this would both help reduce house prices, boost homeownership and reduce rents, benefiting renters, some of whom will never own.”

Saadat Khan, chief executive of modular housing provided, Comfortable Living, said: “The current situation that many young adults are facing with regard to their living situation is simply not acceptable and we are currently witnessing an epidemic whereby young people are unable to even save for a house, let alone buy one.

The huge gap between the wages on offer compared to the cost of homeownership for young adults is shocking and we need to readdress the balance. If they can’t earn more, we must build more in order to provide affordable housing while quelling buyer demand and allowing the market to adjust naturally.

Initiatives, such as modular housing, can be the solution and it is not only a viable method of addressing the issue of supply, but they can be delivered quickly, affordably and nationwide.”

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