The sad realities facing first time buyers — and why their parents are to blame
How the UK government’s “Help to Buy” scheme will help Baby Boomers - at their children’s expense
The property market is broken. Houses are no longer a place to live but an investment tool. The problem is, unlike stocks and shares, which you don’t need; everyone has to live somewhere. Consequently, those who own property are getting richer and those who don’t are getting poorer. The most bizarre part of this story is that the losers are the children of the winners. Why would parents encourage a system that actively hurts their children’s prospect?
Let me tell you a little story…
Throughout high school all pupils are encouraged to head to university to get a degree that will secure them a nice professional job. Our young man Josh, has done just that.He’s got that precious 2:1 undergrad degree from Nottingham and is looking for jobs.
Oh. Well, that’s not quite what he expected. It seems employers don’t really need as many graduates as there are produced and it’s a lot harder than expected to find work. So Josh spends a year bouncing between various “Internships” earning barely enough to buy food, but it was worth it, as he’s now secured that £23k/year all graduates are promised (only a year late).
Now to find a place to lay his head at the end of a long day. Josh’s parents have taught him well about budgeting and he’s hoping to save a little money each month. His take home pay (excluding a pension — but who needs one of them right?) is a healthy £1400/month. He thinks maybe after utility bills he can stretch to £650/month and then have enough for food, transport, some form of social life and savings. What can he get for that near the office he wonders? Ah yes, the bachelor pad of dreams — a 1 room studio over a main road in an area that’s only a little bit “stabby”. Not bad for £8,000 a year right?
Life seems pretty good with his iPhone, Starbucks habit and enjoyment of the odd beer; those hopes of savings don’t quite materialise but never mind. YOLO!
First steps on the ladder
5 years down the line, Josh has a nice girlfriend, Jane, a shared income of £60,000/year (his pay didn’t go up quite as promised but still not too bad) and he starts thinking this renting malarky is a bit wasteful. To the Estate Agents!
Oh dear. The cheapest reasonable 1 bed apartment somewhere within 5 miles of London is £300,000. The banks want a 20% deposit - £60,000. “How do I save a full years income?” he wonders during his hour long journey to work.
Almost as if his mind had been read, he sees in the Metro — “Help to Buy Scheme Launches”. Interesting, 5% deposits with the government chipping in to help with the rest. “How thoughtful of the chancellor to care about my generation. In a years time I can probably rummage together £15,000 no problem!”
It’s 2017 and Josh, Jane (now his wife) and baby George are moving up into a 2 bedroom apartment — luxury! A steal at only £450,000. They’re just about able to pull off the mortgage and the future looks bright.
The ladder breaks
Then it happens. The economy takes a little tumble and the chancellor hikes up interest rates. This hasn't really been a problem in his generation so he’s not really sure what all the fuss is about. But then he comes to renew his mortgage. That £1600/month they've just about been affording now is more like £2500/month and it’s crippling.
They take the only option left, they move back in with mummy and daddy, selling the house at a slight loss. But it’s fine; his parents aren't there most of the time anyway, they’re always on cruises and the house has 4 extra bedrooms they don’t really need.
Josh has lots of time to think on his 2 hour daily commute from the suburbs; one day he spends the journey taking stock of his life. He has a loving family. They have £40,000 of debt that keeps getting bigger (thanks to the loss on the flat). He has a paying job but little real chance of progression. Things could be worse though right?
A message pops up on his iPhone 8, it’s a picture of mum and dad in an air balloon over the Med. He’s happy for them, but he can’t help feel a little envious. He was promised more than your parents generation. They hadn't even been to university. Any yet to even own property outright is now an impossible goal.* How did this happen? What did he do wrong?
Blink and you missed it
The current political structure is designed in such a way to ensure that Baby-boomers are kept happy (and rich). Western Governments, both left and right, are terrified of upsetting the middle classes. Policies all have the effect of keeping them safe. The most obvious of which is the “Help to Buy” scheme.
This single policy, is one of the most astute political slight of hands ever witnessed. In one unobjectionable policy, the government has hurt the long term chances of first time buyers while simultaneously winning their short term affection.
In our story, Josh was unable to afford a step on the housing ladder because the property he wanted was unaffordable. He isn't alone either. There are thousands like him struggling to buy property.
The crux of the matter is that there are more people buying than selling, so sellers can demand a higher price.
In a rational market, there is a natural solution to the problem — increase the supply. Given the number of people out there willing to pay a reasonable price for property, logically there will be some builders and land owners out there keen to build them some to sell.
Sadly for Josh, there is a big obstacle to the housing market behaving rationally: Planning Permission.
Have no doubt about it, there is a conspiracy being orchestrated by Baby Boomers to keep the young out of the property market. What’s fascinating is they don’t realise they are doing it.
Every time a developer looks to acquire land to build homes, they have to look left, right, up the hill, down the hill, around the corner and beyond to check nobody objects. And someone always does. You see any new development will bring down the cost of existing property. Sometimes directly, by blocking a view or creating traffic; sometimes indirectly by increasing supply on the market which brings down cost in that area.
Homeowners want their house to go up in value, and therefore quite rationally do all they can to block things that would make it go down. Like a new block of flats over the road.
Planning permission has left huge swathes of the country off limits for developers. Only the most deprived areas don’t put up a fight over a new development, and there is no room for profit developing there, so developers often just don’t bother.
Which has left us where we are today, with house prices on the rise, completely out of proportion to incomes.
At this point you’d hope the government might step in and force local authorities to be a little more lenient with planning permission - but no, that would piss off the baby boomers who vote them into power. Instead they come up with another way to make everyone happy: “Help to Buy”.
“Help to Buy” does indeed help some young people to buy houses, but sadly at prices they can’t really afford. Interest rates will not be 1% forever, and if they go up, those first time buyers will not be able to afford their mortgages. In the meantime, the scheme disrupts the market. Instead of creating customers for lower cost housing which would fuel demand for low cost housing, it creates a few more customers for high cost housing. That makes Baby Boomers very happy; more customers makes the market even more favourable to sellers, so their house prices keep going up.
This is known as a bubble.
Who will be hurt the most by the bust? You guessed it, that first time buyer who has to declare bankruptcy selling their house for less than they paid for it when they can’t pay the mortgage. Sure, the Baby Boomers will see their house prices fall too, but they owned them outright anyway so they don’t lose any actual money, just money they never actually had in the first place.
Young people must wake up to how they are being inadvertently played by their parents generation, and vote at the ballot box to insist things change.
Young people (under 35s) vote far less than their parents, and bafflingly, a lot of those who do, just vote for the same party as their parents.
A political party interested in helping young people would be bending over backwards to increase housing supply to keep up with demand. Rents would fall, prices would fall and young people would buy. But who loses then? Existing homeowners — Baby Boomers. No current politician in his right mind would want to hurt those who vote for them, and predictably none have stepped forward to do that.
Parents can help too. They need to realise that every time they play the NIMBY (Not In My Back Yard) card, they are reducing housing supply and pushing up prices. When they are the winners and their house price inflates, there must be losers, and it’s their children who are taking on impossible amounts of debt to support someone else’s parents cruise around the Adriatic.
Fundamentally though, the system is designed to have politicians represent those who elect them. As long as young people remain apathetic and don’t turn up to vote, there won’t be anyone to represent them and we will see more of the same.
*if you think they will all live happily ever after when Josh inherits his parents house after they die, take a look at the cost of caring for the Baby Boomer generation who are predicted to live past 100. Will there be anything left in their estate after that’s all paid for?