MSE News: Home ownership dream dwindles for young renters

hcb42

Percy1983 wrote: »

Great you bought originally when prices where in check, yes you may have suffered a few years of high interest rates at some point.

How about going back to when you first bought, take the situation now and honestly could you buy that type of house now doing the job you where then?

As others have said the problem is its getting more out of reach for the average people, the number of people who can't afford houses is growing.

Yes, I have considered that - it would still be within reach based on comparable wages to those jobs we held at the time and current selling prices. The interest rate will be a lot lower though, from 11-13% down to under half those figures.

It would be a slight stretch depending on the multiples based on one income if I had not worked say, but certainly not an unachievable/unrealistic one.

Edit: a fraction over 3.5

jgriggle

An interesting little exercise for anyone who bought their house a few years ago is to go to one of the inflation calculators, and work out how much you paid for your house in today's money. Or even to find out how much your children are paying in rent compared to what you did at the same age. You may be shocked!

Let me give you a little example:

My Dad bought his first house (a two bed mid-terrace) in 1978 for £11,995. At the time he was earning £4,000 a year. After a few years of diligent saving, he was able to put down a 10% deposit and borrow the rest comfortably within the 3.5 x salary that was the norm.

In today's money that would be a salary of £18,320 a year (a little less than what I earn now and about average for where we live). The house would be £54,937, requiring a deposit of £5,494, and a mortage of £49,443. To me that's sensible. By no means easy, but do-able.

As it happens, that same house recently sold for £149,000. As most mortgages seem to require a 20% deposit now, I'd have to save up £29,800!

So whereas Dad had to save about five months worth of take home pay for his deposit (which would still be a struggle for most) I'd now have to save up getting on for TWO YEARS worth of take home pay, even though I earn the same (adjusted for inflation) as he did.

At the time Dad was paying just under a quarter of his take-home pay on rent (for a bigger house than the one I'm in at the moment!). The norm for most renters now is paying out at least half your salary on even the tiniest house/flat.

skellysgirl

iwannabeonthebeach wrote: »

I get cross with statistics like this. Me and my partner bought our first house 18 months ago, I was 23, just, and he was 25. We saved our !!!!!! off for years. We made a conscious decision not to drink/go out excessively/buy the latest gadgets etc and that is how we managed it. People want it all and then moan when they can't have it.

I have to agree, i bought in the 90s, when everyone was struggling to get jobs etc. We worked three jobs between us, We had a baby so hubby would walk in the door, I'd hand the baby over and go to work. We lived on beans and toast for a year. I was only 22 when we bought.
We had no car, no holidays etc, all my friends told me I was mad to be saving and buying, in the mean time they were partying and buying designer clothes.

We bought at a point where we actually had to pay for an indemnity insurance policy incase the house went in to negative equity.

It took us 2 years to come up with a 10% deposit. And took a big risk in buying. We still after that struggled for at least 6/7 years.

But now its paying off. It was sacrifice.

I had a choice at the time, i could have rented or had council housing, and given our low wages we would have qualified for housing benefit. We chose to pay our own way and hope our investment worked.

I might also add our first house was. Street house, with two bedrooms, and troublesome parking. We wanted a three bed with garden and drive, but we knew we had to start at the bottom.

trying_2_b_good

Unfortunately, it is very difficult for single people to buy - especially if you only earn an "average" wage. There's no getting away from that - however it's not impossible if you are in a "cheaper" area and choose a 1 bed flat as a friend has recently done.

I do think that the 3.5 x salary thing is a good idea though - people forget when they're complaining that you have to be able to pay the monthly mortgage bill, plus all of the house bills that go with it - it's not just the deposit that you have to afford! I managed to buy with my fiance last August. We chose a property that is 2.5 x our combined wage. We would have struggled the monthly repayments if we'd gone up to 3.5x. We do both have good jobs, but we'd also done a lot of saving over the years so we had the 10% deposit.

After happlily renting for years, I'm not sure what the fuss is about with buying. Yes - renting is "dead" money - but we spend as much on interest to the bank, and then more on new boilers/decorating etc!

tara747

jgriggle wrote: »

An interesting little exercise for anyone who bought their house a few years ago is to go to one of the inflation calculators, and work out how much you paid for your house in today's money. Or even to find out how much your children are paying in rent compared to what you did at the same age. You may be shocked!

Let me give you a little example:

My Dad bought his first house (a two bed mid-terrace) in 1978 for £11,995. At the time he was earning £4,000 a year. After a few years of diligent saving, he was able to put down a 10% deposit and borrow the rest comfortably within the 3.5 x salary that was the norm.

In today's money that would be a salary of £18,320 a year (a little less than what I earn now and about average for where we live). The house would be £54,937, requiring a deposit of £5,494, and a mortage of £49,443. To me that's sensible. By no means easy, but do-able.

As it happens, that same house recently sold for £149,000. As most mortgages seem to require a 20% deposit now, I'd have to save up £29,800!

So whereas Dad had to save about five months worth of take home pay for his deposit (which would still be a struggle for most) I'd now have to save up getting on for TWO YEARS worth of take home pay, even though I earn the same (adjusted for inflation) as he did.

At the time Dad was paying just under a quarter of his take-home pay on rent (for a bigger house than the one I'm in at the moment!). The norm for most renters now is paying out at least half your salary on even the tiniest house/flat.

Excellent points re inflation and historical house prices - I always ask older peeps who advocate buying at all costs to try this little exercise, and it usually shocks them.

But I must say that it's not normal for every renter to spend 50% of their salary on rent. We spend less than 10% of our joint salary on rent for a very nice house in the nicest part of our city (with rates/council tax included in the rent), maybe we are just lucky. Are you living in London or somewhere unusually expensive?

skellysgirl wrote: »

I have to agree, i bought in the 90s, when everyone was struggling to get jobs etc. We worked three jobs between us, We had a baby so hubby would walk in the door, I'd hand the baby over and go to work. We lived on beans and toast for a year. I was only 22 when we bought.
We had no car, no holidays etc, all my friends told me I was mad to be saving and buying, in the mean time they were partying and buying designer clothes.

We bought at a point where we actually had to pay for an indemnity insurance policy incase the house went in to negative equity.

It took us 2 years to come up with a 10% deposit. And took a big risk in buying. We still after that struggled for at least 6/7 years.

But now its paying off. It was sacrifice.

I had a choice at the time, i could have rented or had council housing, and given our low wages we would have qualified for housing benefit. We chose to pay our own way and hope our investment worked.

I might also add our first house was. Street house, with two bedrooms, and troublesome parking. We wanted a three bed with garden and drive, but we knew we had to start at the bottom.

I have no wish to start at the bottom, and pay 2 or 3 lots of stamp duty, EA fees etc 'moving up the ladder' - it is a con. With the collapse in house prices comes the opportunity to buy a long term home rather than a 'starter' home, which are v. difficult to sell in a downturn. Which is why I am thankful that we didn't buy during the boom of the last few years.

NPowerUser wrote: »

Many of today's younger generation cannot go without foreign holidays, gadgets, latest mobile phones and expensive contracts, going out to the pubs and clubs, takeaways and ding ding meals at home.

Probably the one's calling for 50% drops in house values, which isn't going to happen!

That's a bit of a generalisation. See my sig. I know I'm unusual, but not every young person/renter is p***ing away their money on tat. I love to travel and won't sacrifice that - life is too short - but I make savings elsewhere.

p.s. I hate ding dinners, give me home cooked food any day.

tara747

trying_2_b_good wrote: »

Unfortunately, it is very difficult for single people to buy - especially if you only earn an "average" wage. There's no getting away from that - however it's not impossible if you are in a "cheaper" area and choose a 1 bed flat as a friend has recently done.

I do think that the 3.5 x salary thing is a good idea though - people forget when they're complaining that you have to be able to pay the monthly mortgage bill, plus all of the house bills that go with it - it's not just the deposit that you have to afford! I managed to buy with my fiance last August. We chose a property that is 2.5 x our combined wage. We would have struggled the monthly repayments if we'd gone up to 3.5x. We do both have good jobs, but we'd also done a lot of saving over the years so we had the 10% deposit.

After happlily renting for years, I'm not sure what the fuss is about with buying. Yes - renting is "dead" money - but we spend as much on interest to the bank, and then more on new boilers/decorating etc!

Amen to that...

jamesd

The IPRI might consider that people have different spending priorities and some could easily handle borrowing more than 3.5 times their salary. It's not an idea that would make sense for all borrowers as a regulation prohibiting lending more.

trying_2_b_good, for an example of why you can't generalise, consider someone just on higher rate income. Gross pay £3539.58 a month, net pay £2619.24. Say they are spending around £1200 a month total, including say £500 a month rent. That's around £1419 a month not being spent, after bills. Now have that person borrow 3.5 times their £42,475 salary at 5%, a mortgage of £148,000. Interest on that is £616 so their mandatory spending increases by £166 and income left over falls to £1253. If they want a repayment mortgage the capital repayments needed to clear it over 25 years are an additional £259 a month, leaving them with £994 a month.

So they are at £875 repayment mortgage cost with £994 left over.

Doesn't make a lot of sense to cap someone who could pay twice the 3.5 times salary repayment mortgage bill at that level. It might not be a good idea for them to borrow 7 times salary, even though that would be affordable on their income and lifestyle. Whether it's good or bad at 7 times depends on the rest of their situation, like how many years worth of bills they have saved in their emergency fund and what the prospects for higher pay are.

One fairly predictable prospect for higher pay comes from inflation-related pay rises. At the usual RPI+1% that pay tends to rise at long term the year after the mortgage is taken out would see an increase of around £176 a month gross, £102 net if inflation was at 4% and 40% tax and 2% NI were paid. Inflation is an ally when it comes to clearing mortgages - time can make seemingly large amounts a lot smaller in real terms.

That £102 would increase their 7 times income mortgage spare monthly net pay margin from £119 to £221 on repayments of £1759 a month, though some bills would have increased, reducing the effective increase a bit.

tara747

jamesd wrote: »

The IPRI might consider that people have different spending priorities and some could easily handle borrowing more than 3.5 times their salary. It's not an idea that would make sense for all borrowers as a regulation prohibiting lending more.

trying_2_b_good, for an example of why you can't generalise, consider someone just on higher rate income. Gross pay £3539.58 a month, net pay £2619.24. Say they are spending around £1200 a month total, including say £500 a month rent. That's around £1419 a month not being spent, after bills. Now have that person borrow 3.5 times their £42,475 salary at 5%, a mortgage of £148,000. Interest on that is £616 so their mandatory spending increases by £166 and income left over falls to £1253. If they want a repayment mortgage the capital repayments needed to clear it over 25 years are an additional £259 a month, leaving them with £994 a month.

So they are at £875 repayment mortgage cost with £994 left over.

Doesn't make a lot of sense to cap someone who could pay twice the 3.5 times salary repayment mortgage bill at that level. It might not be a good idea for them to borrow 7 times salary, even though that would be affordable on their income and lifestyle. Whether it's good or bad at 7 times depends on the rest of their situation, like how many years worth of bills they have saved in their emergency fund and what the prospects for higher pay are.

One fairly predictable prospect for higher pay comes from inflation-related pay rises. At the usual RPI+1% that pay tends to rise at long term the year after the mortgage is taken out would see an increase of around £176 a month gross, £102 net if inflation was at 4% and 40% tax and 2% NI were paid. Inflation is an ally when it comes to clearing mortgages - time can make seemingly large amounts a lot smaller in real terms.

That £102 would increase their 7 times income mortgage spare monthly net pay margin from £119 to £221 on repayments of £1759 a month, though some bills would have increased, reducing the effective increase a bit.

Even with the 3.5 salary BORROWING cap, they could just save more and add it to what the bank will lend them if they want to buy a more expensive house... simples.

jamesd

tara747 wrote: »

Even with the 3.5 salary BORROWING cap, they could just save more and add it to what the bank will lend them if they want to buy a more expensive house... simples.

I don't see a sufficient reason to make them wait the extra 12 years it would take to accumulate the additional £148,000 on the £994 left over after borrowing £148,000 or the 8.5 years if they carried on renting.

Brallaqueen

I agree, as a the proud owner of a two bed flat, that houseprices are ridiculous.

However, I don't think they are going to come down in any great rush, and I needed to buy my own home for the sake of my mental health. Sometimes it is not just money that you need to factor in but your own personal lifestyle, health and happiness.

I also do not wish for lending to be capped at 3.5 earnings, because I thnk this penalises people (like me) who exist on a fairly low wage but have no outgoings to speak of and can therefore service a larger mortgage. I think affordability has to be the key - someone on £50k is not necessarily able to afford more than someone on £30k once you take outgoings into account.