• A child born today would need £85,000 to pay a 10% house deposit at age 25, if price growth continues its 20 year trend
• A 5% deposit in 2046 would cost £23,500 in today’s terms, almost the same as the £25,000 required for a 10% deposit today
• House prices have grown on average 2% more than average wages over the last 20 years
• The government continues to throw fuel on the fire of a booming property market
Laith Khalaf, financial analyst at AJ Bell, comments:
“Quarantennials will probably look back with anger on government policies of the last ten years, which have repeatedly thrown fuel on the fire of a booming housing market. As soon as the flames start to subside a bit, another bucketful gets chucked on, and if reports are to be believed, we’re due another instalment in the forthcoming Budget, as the Chancellor is reportedly considering extending the stamp duty holiday.
“Rishi Sunak is also reported to be weighing up a mortgage support scheme to bring back 95% mortgages. A mortgage guarantee scheme for first time buyers would be a better, more targeted policy than the blanket stamp duty holiday, to give a helping hand to those who otherwise might not be able to get on the housing ladder.
“However it doesn’t solve the underlying problem, which is that property prices are rising significantly faster than wages, and government initiatives to keep the housing boom going serve to exacerbate the issue. Unless the support the government puts in place becomes a permanent, structural feature of the housing market, then it simply delays the inevitable day of reckoning when the measures are withdrawn.
“While today’s first time buyers have it hard, the next generation may find getting on the housing ladder even tougher. If house prices continue to grow at the same rate they have for the last twenty years, a child born today faces paying £85,000 for a 10% deposit on the average house, when they reach 25 years of age. That’s £47,000 in today’s terms, allowing for 3% wage inflation, almost double the £25,000 needed for a 10% deposit here and now. Today’s borrowers also benefit from incredibly low interest rates, the next generation of homebuyers are unlikely to be as lucky on that score.
“For most people the years of early adulthood are the toughest financially. Young people have to wean themselves off the bank of mum and dad, and get to grips with paying their own way, often while studying, or earning a meagre wage, or both. Saving for a house deposit is often way down the list of priorities, and £85,000 might as well be a king’s ransom.
“One thing quarantennials do have on their side, is time. While not many newborns have the nous to start a savings plan early, their parents can take matters into their own hands if they have the means. By investing in a tax-efficient Junior ISA, parents and grandparents can harness the long term earnings power of the stock market, to give their child a head start.
“An £85,000 lump sum is a tremendous amount of money for a 25 year old to have, even taking into account inflation, but it can be achieved by saving £145 into a Junior ISA each month until their 18th birthday, assuming investment growth of 6%. Even a £50 monthly saving would yield a lump sum of £29,500 at age 25, which can at least help pay for training and education, ease financial pressures, or go towards a house deposit.
“We know the pandemic has been particularly cruel to young people, with under 25s accounting for almost 60% of job losses. It’s therefore entirely justified for the government to focus on helping this cohort financially. But the Treasury also needs to start thinking a bit longer term about whether it wants the taxpayer to step back from supporting house prices, and if it does, how we get there.”
An £85,000 deposit for 10% of the average house in 2046
“The average house price is currently £252,000 according to the ONS. A 10% deposit therefore requires a £25,000 lump sum. Wages have risen by just under 3% a year on average over the last 20 years, but house prices have grown by 5% annually on average (ONS data).
“If property prices continue to grow at that rate, when today’s newborns are 25, the average house will cost £850,000, and they will need £85,000 to lay down a 10% deposit. Even to put down a 5% deposit, they will need £42,500. In today’s term’s that’s £47,000 and £23,500 respectively, allowing for 3% wage inflation. In other words, if house prices and wages continue to grow at their historic trend rates, in 2046 a 5% deposit will cost about the same as a 10% deposit today.
“Clearly in the next 25 years, many of the tailwinds which have been behind the property market may slow, or go into reverse. But if the next 25 years does turn out like the last 20, getting on the housing ladder is going to prove even harder for the next generation. Even in a benign situation where wage growth matches property price growth, the affordability crisis will not have subsided, it will simply have stagnated.”