Sahil Suleman of Queen Elizabeth's School, Barnet, won the 14-16 year old category of ifs University College's Young Financial Journalist of the Year Competition. Entrants were asked to write an essay answering the question: What is the biggest financial challenge facing your generation?
With rising house prices, and low real-term wage growth, could buying a home be the most difficult challenge that young people will face?
House prices have risen 9.7% in the year to January, and the average UK house or flat costs £212,430. With this trend being forecast to continue on into the future, house prices will become more and more unaffordable for young generations.
""Upwards pressure on house prices may be a result of a shortage of supply and a strengthening of demand in the housing market, a view supported by a number of house market indicators,"" the ONS said.
In 2007, the Labour government set a target for 240,000 homes to be built each year by 2016. The UK government has been unable to meet these targets, and have only built 150,000 homes a year since. With complex planning conditions and a lack of available land in the UK, this has made it hard for home builders to build enough homes to meet the rising demand, causing a large rise in prices.
With this trend expected to continue, young adults will find it increasingly hard to buy a home. With real-wages rising very slowly compared to the rapid rise in house prices, housing will become more and more unaffordable, with monthly mortgage repayments also becoming more expensive for those who do buy homes.
Unless real-term wages and employment levels start to increase at the same pace as house prices, we may see a similar situation as to what happened in USA in 2008
Mortgages will also be harder to acquire. After the financial crash of 2008, where financial institutions invested in the sub-prime market, allowing people with untested or poor credit histories to acquire mortgages, many banks have tightened their conditions, and have reduced the risk of lending mortgages by only lending to people with good credit histories who are likely to repay debt.
Since 2008, the government changed the role of the UK banking regulation system, creating bodies such as the Financial Conduct Authority and the Prudential Regulation Authority. These bodies monitor banks closely to prevent another housing crisis, forcing banks to become more cautious about who they lend to. This will mean that it is harder for young people to acquire a mortgage as banks are less likely to lend to young people who have untested credit histories, and therefore young people may have to delay the purchase of a house until they are older and banks can trust them. This provides another challenge for buying a home. With 60% of all houses in the UK being bought through mortgages, a tightening of the conditions needed to obtain one will mean that houses will become even more unaffordable for young adults whose purpose of buying a home is for residence.
With interest rates at a very low rate of 0.5% for the last few years, many people have found buying a house easier as mortgage repayments have been cheaper. However, with interest rates certain to increase over the next 5 years to higher levels, teenagers of today will find that their mortgage payments will be considerably larger than those seen today.
With higher house prices being compounded with increased interest payments on mortgages, buying a home is expected to be very expensive in the future, draining the income of young adults, and reducing living standards in the UK as a whole.
The tightening of the conditions needed to obtain [a mortgage] means that houses will become even more unaffordable for young adults
Even with the government’s Help to Buy Scheme, giving first time buyer’s financial help, in the long-term home buyers will find costs and repayments very expensive, placing a large burden on their wealth and long-term financial stability. Unless real-term wages and employment levels start to increase at the same pace as house prices, we may see a similar situation as to what happened in USA in 2008, where many people had to default on their mortgages, affecting the whole structure of the financial system.
Another difficulty that young people will have to face which will affect their ability to buy a home will be student debt. With more and more jobs being only available for graduates in the UK, many young people are deciding to go to university, taking on large amounts of student debt, thinking that they will be able to pay it all off in a few years after they have started a job. However, this has not been the case with most people.
A quarter of jobs in the UK are only available for graduates. This has forced a large number of teenagers into university education, with the thinking that this will be the only way to secure a high salary job. A recent study conducted by the Institute of Fiscal Studies showed that three quarters of students will still be repaying their student debt when they are in their 50s. This shows the large burden that young students will face and will severely affect their position for buying a house. Many young people will be reluctant to take on extra debt in the form of a mortgage, reducing the number of young people buying a home. With today’s students leaving university with an average debt of £44,000, fewer and fewer people will be in the correct financial position to buy a home, making it more and more difficult to purchase one.
With the ‘baby boom’ generation benefiting from free university education, the creation of free healthcare, and large capital gains on housing, many say that they “had it all”. However, after the troubles of the financial crash and the credit crunch, this has and will affect the lives for the next generation. The high rises in house prices will instead provide an encumbrance for the generation of the future, draining their wealth and affecting living standards in the UK as a whole, unless housing is made more affordable and real-wages rise at a similar rate to that of housing.
With the government’s Help-to-Buy scheme as a starter, more needs to be done by banks and the government to make housing more affordable for first-time buyers, in order to make low interest mortgages and low cost deposits on housing more accessible to young adults.