House price appreciation is no longer a sure thing. Or so the Millennials and members of Generation Z who climbed onto the ladder in 2020 are discovering to their dismay.
These groups will be the first cohort of first-time buyers to experience real-terms (taking inflation into account) losses on their homes during the first five years of ownership. Since 2020, while the average value of a home in Great Britain has risen by 27%, after accounting for inflation, this translates into a 3% decline in real terms.
This is in marked contrast to the fortunes of previous generations of first-time buyers. A member of the Silent Generation, the name given to those born between 1928 and 1945, who realised the dream of home ownership in 1968, enjoyed a real-terms rise of as much as 106% during the first five years.
Baby Boomers, those born between 1946 and 1964, the members of Generation X (1965-1980) and Millennials (1981-1996) have also benefited from real terms gains.
By contrast, the first-time buyers of 2020 have suffered a double whammy of high house prices and then high interest rates. During the first 15 years of a 30-year mortgage, the average member of this group will make a total of £191,029 in mortgage repayments. This is £97,000 (103%) more than the average Silent Generation member, whose repayments during the first 15 years of ownership amounted to £93,943 in today’s money.
But there's more. Higher mortgage rates mean that a larger slice of first-time buyers' monthly repayment on this debt goes towards interest, rather than clearing capital. As much as 58% of the house price growth seen by the person who climbed onto the ladder in 2020 has gone towards paying the interest. This compares with 31% over the same five-year period for Millennials who bought in 2011 at a time of lower interest rates.
" Millennials and members of Generation Z will be the first cohort of first-time buyers to experience real-terms losses on their homes during the first five years of ownership."
Looking ahead, expensive house prices and relatively high mortgage rates are likely to mean that the person who became a homeowner in 2020 will also face more burdensome repayments during the second 15 years of their mortgage term. This represents another reason to feel less fortunate than those who acquired a home of their own in past decades.
Some will dispute whether this feeling of disadvantage is a justified source of resentment. But there are adverse consequences for the economy.
Another economic consequence of the weakness in house prices is fewer relocations. Those who bought in 2020 seem more likely to stay put for longer than their predecessors, who tended to move up the housing ladder fairly rapidly, spending on legal and removal services and putting money into improvements, carpets, sofas and suchlike.
Our research shows that people proposing to sell a home want to get back the amount they paid for the property, even if a slower market means they can acquire another home at a competitive price.
The reluctance is particularly marked among those who put down a small deposit of 5-10%, or bought without a deposit. In some cases, they have little or no equity to buy another larger, more expensive property, even if its value has also been hit by the slowdown.
" Those who bought in 2020 seem more likely to stay put for longer than their predecessors, who tended to move up the housing ladder fairly rapidly."
With this in mind, it has been argued that a house price growth target should form part of the Bank of England’s inflation target. If the Bank decided to adopt such a policy, it would need to target a fairly low positive figure that is small enough to prevent prices from accelerating beyond incomes.
However, the figure would also need to be set at a level high enough to ensure that temporary market conditions do not trap new homeowners, which has an impact not only on them but also on the wider economy.
