Well last week’s article “The Unfairness of the Locks Heath Baby Boomer’s £3,373,900,000 windfall?” caused a stir.  In it we looked at a young family member of mine who was arguing the case that Millennials (those born after 1985) were suffering on the back of the older generation in Locks Heath.  They claimed the older generation had seen the benefit of the cumulative value of Locks Heath properties significantly increasing over the last 25/30 years (which I calculated at £3.37bn since 1990).  In addition many of the older generation (the baby boomers) had fantastic pensions, which meant the younger generation were priced out of the Locks Heath housing market.

I replied there should be no surprise though that the older members of our society hold considerably more of our country’s wealth than the younger generation.  This wealth is accrued and saved across someone’s life, and reaches it’s peak about the time of retirement.  If we are to comprehend differing wealth levels between generations we need to compare ‘apples with apples’.  It is much more important to track the wealth held by different generations at the same age, i.e. what was ‘real’ wealth of the 30-something couple in the 1960’s compared to a 30-something couple say in the 1980’s or 2010’s?

So could it be all about these people saving?  The fact is, in the last 10 years, UK households have saved on average 7.5% to 8% of the household income into savings accounts, compared to an average of 6% to 7% in the late 1960’s and 1970’s.  The baby boomers haven’t been actively squirreling away their cash for the last 30 or 40 years in savings accounts to accumulate their wealth.  Most of their gains have been passive, lucky bonuses gained on the back of things out of their control (unanticipated and massive property value rises or people living longer making final salary pensions more valuable) – it’s not their fault!

… and herein lies the issue… it is assumed that these Millennials aren’t buying property in the same numbers like the older generation did in the past (because most of their wealth has come from house price inflation).  The Millennials have often been described as ‘Generation Rent’, because they rent as opposed to buying property – because we are told they can’t buy.

However, when Locks Heath mortgage payments are measured against monthly income, home ownership is affordable by historic standards because mortgage rates are currently so low.  As you can see, the ratio of average house price to average earnings in Locks Heath hasn’t vastly changed over the last decade…

• 2008 average house price to average earnings of a single person in Locks Heath 8.48 to 1
• 2017 average house price to average earnings of a single person in Locks Heath 9.28 to 1

(i.e. in 2008, the average house price in Locks Heath was 8.48 times more than the average person’s salary in Locks Heath and this has only risen to 9.28 in 2017 – and all this off the property boom of the early 2010’s)

95% first-time buyer mortgages were reintroduced in 2010.  The average interest rate charged for those 95% FTB mortgages has slowly dropped from around 5.5% in 2009 to the current 4% rate.  Back in the 1980’s/1990’s mortgage interest rates were between 8% and 10%, and one time in the early 1990’s, reached 15%!  The main difference between the two periods was the absolute borrowing relative to income is greater now than in the 1980’s. They call this the ‘mortgage to joint household income ratio’.  In the 1980’s the mortgage was between 1.8x to 2x joint income; today it is 3.4x to 3.6x salary.

The simple fact is, in the majority of cases, it is still cheaper for a first-time buyer to buy a property with a 95% mortgage, than it is rent it.  The barrier for these Millennials, has to be finding the 5% mortgage deposit – instead of being able to afford monthly mortgage outgoings at the current 95% mortgage rates?

Millennials make up 5,279 households in the Fareham Borough Council area (or 11.33% of all households in the area).  However, behind the doom and gloom, surprisingly, 48.2% did save up the 5% deposit and do in fact own their own home (that surprised you didn’t it!)

Nonetheless, the majority of Millennials in the area still do rent from a Landlord (1,910 Millennial households to be exact).  Yet, they have a choice.  Buckle down and do what their parents did and go without the nice things in life for a couple of years (i.e. the holidays, out on the town two times a week, the annual upgraded mobile phones, the £100 a month Satellite packages) and save for a 5% mortgage deposit… or live in a lovely rented house or apartment (because they are nowadays), without any maintenance bills and live a life with no intention of buying (because renting doesn’t have a stigma anymore like it did in the 1960’s/70’s (secretly hoping their parents don’t spend all their inheritance so they can buy a property later in life – like they do in central Europe).

Neither decision is right or wrong although it is still a choice.  Until Millennials decide to change their choices – that is the reason why the country’s private rental sector will continue to grow for the next 30 years – meaning happy Tenants and happy Landlords.

Recently I was having a chat with one of my older relatives at a big family get-together. We and a couple of their children got talking over a drink about the times of 15% interest rates and how the more mature members of our family had to endure the 3 day week, 20% inflation and the threat of nuclear annihilation in 4 minutes.  So, foolishly, my older relative said what with all the opportunities youngsters had today, they had never had it so good!

Trust one of my relative’s children to have gained some financial/economics qualifications before going to Law School, as they debated with us the genuine economic predicament of Millennials and how a combination of student debt, unemployment, global proliferation, EU migration and rising house values is reducing the salaries and outlook of masses of the UK’s younger generation, causing an unparalleled disparity of wealth between the generations. So of course I asked why that was?

They said Millennials were paying the price for the UK’s most spectacular bookkeeping catastrophe to date (bigger than the Bank bailout after the Credit Crunch).  Back in the 1950’s and 1960’s, nobody predicted us Brit’s would live as long as we do today, and in such abundant numbers. The OAP pensions that were promised in the past (be that Government State Pension or Company Final Salary Schemes) which appeared to be nothing fancy at the time, are now burdensomely over-lavish, and that is hurting the Millennials of today and will do so for years to come.

Bringing it back to property, the ‘soon to be’ lawyer stated that baby boomers born between 1945 and 1965 have been big recipients of the vast rising house prices over the 1970’s/80’s/90’s and 2000’s.  Add to that their decent pensions, meaning cumulatively, their wealth has grown exponentially through no skill of their own.

This disparity of wealth between the older and younger generations could have unparalleled consequences for the living standards of younger Millennials…. So Houston Locks Heath – do we have a problem??

Well Locks Heath Property Blog readers, you know I like a challenge.  I can’t disagree with some of what my relative said, but there are always two sides to every story, so I thought I would do some homework on the matter…

Since 1990, the average value of a property in Locks Heath has risen from £89,800 to its current level of £336,900.  As there are a total of 13,654 homeowners aged over 50 in Locks Heath, that means there has been a £3.37bn windfall for those Locks Heath homeowners fortunate enough to own their own homes during the property boom of the 1990s and early 2000’s.

I must admit that the growth in property values in the 1990’s and 2000’s certainly helped many of Locks Heath’s baby boomers.  The figures do appear to put into reverse gear the perceived wisdom that each generation gets wealthier than the previous one… and so with all this wealth, the figures do back up the argument that Millennials are being priced out of home ownership.

Or do they?  Are they?

Next week, I will carry on this discussion where I will give the Baby Boomer’s defence to the prosecution’s case!

On several occasions over the last few months, in my Locks Heath Property Blog, I predicted that the rate of rental inflation (i.e. how much rents are rising by) had eased over the last year.  At the same time I felt that in some parts of the UK rents had actually dropped for the first time in over eight years.  Recent research backs up this prediction.

Rents in Locks Heath for new tenancies fell by 0.4% in the last 12 months (i.e. not existing Tenants experiencing rental increases from their existing landlord).  When we compare that current rate with the historical rental inflation in Locks Heath, an interesting pattern emerges:

2016 – Rental Inflation in Locks Heath was 5.1%

2015 – Rental Inflation in Locks Heath was 9.4%

2014 – Rental Inflation in Locks Heath was 3.2%

The reason behind this change depends on which side of the demand/supply equation you are looking from.  On the demand side (from the Tenants’ point of view) there is the uncertainty of Brexit and the fact that salaries are not keeping up with inflation for the first time in three years. Critically this means Tenants have less disposable income to pay their rent.  As an aside, it is interesting to note that nationally, rent accounts for 29% of a Tenant’s take home pay.

On the supply side of the equation (Landlords’ point of view) Brexit also creates uncertainty. However, the biggest issue was a massive upsurge of new rental properties coming on to the market in late 2016, caused by George Osborne’s new 3% stamp duty tax for landlords in the first part of 2016.  This meant a lot of new rental properties were ‘dropped’ on to the rental market all at the same time.  The greater choice of rental properties for Tenants curtailed rental growth/inflation.  A slight softening of Locks Heath property prices has compounded this.  Figures from The Bank of England suggested that first time buyers rose over the last 12 months as some were more inclined to buy instead of rent.  Together, these factors played a part in the ongoing moderation of rental growth.

The lead up to the General Election in May didn’t help: after all people don’t like doubt and uncertainty.  So now that we have a mandate for going forward over the next 5 years hopefully that has removed any stumbling blocks stopping Tenants making the decision to move home.

Whether it be ‘hard’ or ‘soft’ Brexit negotiations (and with the Election result the Tory’s might have to be ‘softer’ on those negotiations) the simple fact is, we aren’t building enough properties for us to live in.  Both in Locks Heath, the South East and the wider UK, long-term population trends imply that rents will soon be growing faster than inflation again.  Look at the projections by the Office of National Statistics:

Tenants will still require a vibrant and growing rental sector to deliver them housing options in a timely manner.  As the population grows in Locks Heath, and wider afield, any restriction to the supply of rental properties (brought about by poor returns for Landlords) cannot be in the long-term best interest of Tenants.  Simply put rents must go up!

The fact is that I see this as a short-term blip and rents will continue to grow in the coming years.  With rents only accounting for 29% of a tenants’ disposable income, the ability for most Tenants to absorb a rent increase does exist.

50 years ago, in 1967, the first human heart transplant was performed by Dr Christian Barnard in South Africa.  In the same year Sweden switched from driving on the left-hand side to the right-hand side of the road.  The average value of a Locks Heath property was £4,845, interest rates were at 5.5% and The Beatles released one of my favourite albums – their Sgt Pepper album… but what the hell has that to do with the Locks Heath property market today??  Quite a lot actually… so with my music turned up loud, let me explain my friends!

I have been doing some research on the current attitude of Locks Heath first-time buyers.  First-time buyers are so important for both landlords and homeowners.  If first-time buyers aren’t buying, they still need a roof over their heads, so they rent (good news for Landlords). If they buy, demand for Locks Heath property goes up for starter homes and that enables other Locks Heath homeowners to move up the property ladder.

First-time buyers are the lifeblood of the property market.  They are, however the most susceptible to interest rate rises and the affordability of mortgages.  With that in mind, let us see what is happening to them…

The average value of a property in SO31 is currently standing at £365,348 and UK interest rates at 0.25%.  As each year goes by, it appears the age of the everlasting mortgage has started to emerge, prompted by these first-time buyers eager to get a foot on the housing ladder.  I was reading a report a few days ago where some mortgage companies confessed that the battle to gain big returns from the property market has led to mortgages that will take considerably longer than the customary 25 years to pay off.

Over the last few years, it has been commonplace for first-time buyer mortgages to be 30 and 35 years in length as the ‘Bank of Mum and Dad’ have been helping with the deposit (Beatles Sgt Pepper song – With a Little Help from My Friends).  Now, some high street banks are offering mortgage terms of 40 years.  This means first-time buyers could be paying until their mid 60’s – I can hear that other great track from the same album When I’m Sixty-Four ringing in my ears!  So, a 50-year mortgage does not seem as far-fetched now as it would have been back in the 1970’s.  After all life expectancy for a male then was exactly 69 years and today its 79 years and 5 months!

Over the last ten years, Locks Heath property prices have continued to rise more than wages, therefore, first-time buyers are looking for bigger loans.  If this development continues, the only way repayments can remain reasonable is by increasing the term of the loan.

However, some commenters have said there are worries the mortgage companies are lending money over such a long term, they threaten leaving some first-time buyers with a generation of debt if the house price bubble bursts.  Interestingly, when I looked at what had happened to average property values in Locks Heath over the last 50 years, there have been bubbles.  First-time buyers should take heart, since as a county we have always recovered from it a few years later.

What if interest rates rise?  Well looking at historic UK interest rates, the current rate of 0.25% is at a 300-year low.  Mortgages will never be cheaper.  I would however, seriously consider fixing the rate to cushion any future potential interest rate rises (since they can only go in one direction when they do change).  If Locks Heath first-time buyers see buying a home as a long-term decision, based on the last 50 years, they should be just fine!

Before I go, a final thought for property buyers in Sweden, the land of Volvo and Abba. As Swedish property prices are so high, Swedish Regulators announced last year limits on the length of Swedish mortgage terms.  They don’t bother with 50-year mortgages.

No, our Volvo-loving Swedish friend’s average mortgage length is 140 years (this is not a typo).  Although such mortgages have had their Waterloo (Abba), regulators have significantly reduced the maximum term of a Swedish mortgage to 105 years.  Either way, that’s a lot of Money, Money, Money (Abba again – Sorry!) to pay back!

Now I will leave you in peace as I listen to the 1980’s Madness song ‘Our House’.  My apologies to all the Beatles and Abba fans in Locks Heath – a bit of light hearted fun albeit on a serious topic.