Would £10k Handout Save First-Time Buyers From Rental Trap?
Would £10,000 Save First-Time Buyers From Getting Caught In The Rental Trap?
Over the last decade you’ll probably read a number of stories about many millennials (the catch-all term for a person reaching young adulthood early in the 21st Century) being caught in a rental trap. Rising house prices and the need to have a reasonable deposit in place to secure a mortgage have increased the amount people need to save to get onto the property ladder, but rising rents have made it impossible for many people to accumulate savings.
More recently in Edinburgh the situation has been exacerbated by the fact that most properties are selling for more than their Home Report valuation, further increasing the amount of cash buyers need to have on hand to secure a property. Partly in response to this, the Resolution Foundation achieved blanket media coverage last week when it suggested all millennials should receive a ring-fenced £10,000 at the age of 25.
The report outlines a proposal for redistributing wealth back in favour of young people funded through an inheritance tax reform. Under the proposal the £10,000 sum would be provided solely to aid young people in securing a stable start in their independent life, so could only be spent on a deposit for a house, a business start-up, a pension or education.
At first glance the idea itself looks promising – and who would turn down free money? However on closer inspection it’s doubtful that the proposal would provide a long-term solution to the problems that young people face in getting onto the property ladder.
Demand Will Exceed Supply Fundamentally, a big part of the reason that house prices are rising is that the number of households in the UK is rising more quickly than the rate at which we are building houses. The population is rising, people are living longer and more people are living in smaller households all of which means that household numbers are projected to rise sharply. The problem of rising household numbers is particularly acute in the local market. Latest Household Projections for Scotland predict that the number of households in Edinburgh will rise by 30% between 2014 and 2039, with Midlothian projected to see a similar increase of 31%.
In recent years the supply of new houses being built has simply not been sufficient to keep pace with this rising demand. When demand exceeds supply, prices will rise. And of course it’s not just houses that need to be built. Schools, roads, libraries and other amenities required to create new communities will also be required.
Adding Fuel To The Fire? The next problem with simply giving people more money to put towards housing is that there is a real danger that, over the medium and long term it will serve to further inflate house prices. It will essentially serve to further boost demand in the short-term but unless the underlying lack of supply is addressed, this will only push prices further north.
The proposal is certainly well-intentioned, but it’s possible that unintended consequences stemming from it could exacerbate problems for future generations.
The Money May Not Go Where It’s Intended The theory of limiting people to only being able to spend the £10,000 on things like housing or an education sounds great. In practise though, it would be incredibly difficult to police. For example, if someone has already managed to save a reasonable amount of money to put towards a deposit, there would appear to be very little preventing them from spending their savings on anything they want, then using the ‘new’ £10,000 for their deposit.
The Search For A Holistic Solution Over the last 20 years we have seen a number of different initiatives aimed, in whole or in part, at making it easier for first-time buyers to get onto the property ladder. We’ve seen a variety of government-backed shared equity schemes, Help to Buy ISAs, Stamp Duty reform and affordable housing initiatives.
The reality is that there is no simple, silver bullet solution that will make life easier for first-time buyers. There has been a fundamental problem over a prolonged period of time where the rate at which we have been building new homes has been insufficient to keep pace with demand. Solving that problem isn’t easy, nor will it happen overnight. Ultimately the market will need a comprehensive solution that addresses problems on both the supply and demand side of the equation if we want to make things easier for first-time buyers now and in the future.