Give the next generation a stake – Davies

That assumption can no longer be taken for granted.

Recent analysis highlighted by Sunday Times economics editor David Smith makes uncomfortable reading. Real gross domestic product (GDP) per head has risen by just 8% over the past 18 years, compared with 43% in the preceding 18 years and 53% in the 18 years before that.

Younger generations are entering adulthood against a backdrop of sluggish economic growth, significant student debt and rising pressure on the public finances. They increasingly question whether the pensions and public services enjoyed by today’s older generations will be available to them on the same terms.

It is hardly surprising that growing numbers expect to be worse off than their parents.

Against that backdrop, the government’s announcement of the Your First Home scheme for first-time buyers is significant. There is no single policy that can solve the financial challenges facing younger generations, but giving more people a realistic opportunity to become homeowners is an important place to start.

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The context and challenges of homeownership

Homeownership has a particularly important role to play because a home is much more than somewhere to live. For millions of ordinary households, it has historically provided the principal means of accumulating substantial wealth over a lifetime.

The IMLA has previously calculated that someone renting privately rather than buying could be around £350,000 worse off over 30 years, even without allowing for any increase in the value of the property.

More recent research from Yorkshire Building Society and Public First reinforces the scale of the divide. Its modelling, following a homeowner and renter from the age of 33-88, found that the renter could spend around £1.6m on rent over that period, compared with £367,000 in mortgage payments for the homeowner. By the end, the homeowner is projected to own an asset worth around £1.7m, while the renter has no housing asset to show for those decades of payments.

Taken together, the research estimates that the homeowner could be as much as £2.6m better off than the lifetime renter.

Perhaps most strikingly, around £960,000 of the renter’s additional housing costs arise after retirement, when the homeowner is assumed to have paid off their mortgage.

Long-term projections inevitably depend on assumptions about future house prices and rents, but the fundamental point is difficult to dispute. A homeowner gradually pays down their mortgage and builds equity in an asset, while also working towards a point at which their housing costs fall substantially. A private renter may continue to face significant housing costs throughout retirement.

Yet homeownership has become harder to achieve. The IMLA estimates that since the financial crisis, around three-and-a-half million households who might historically have been expected to become first-time buyers have failed to do so. That represents not just millions of delayed home purchases, but millions of households potentially missing years in which they could have been accumulating housing equity and strengthening their financial position for later life.

There is another uncomfortable dimension to this. As buying a first home has become harder, family wealth has become increasingly important in determining who succeeds.

Those fortunate enough to have parents who accumulated housing wealth may be able to call upon the Bank of Mum and Dad for help with a deposit. Those whose parents were unable to build that wealth are less likely to have the same opportunity.

Unless we are careful, therefore, housing risks reinforcing inequality not only between generations, but within them.

The new scheme

That is why the government’s intention to target Your First Home particularly at those without access to family wealth is welcome. Under the proposals announced so far, eligible first-time buyers purchasing a new-build home in England will be able to put down a deposit of just 2.5%, supported by a 20% government-backed equity loan with an initial interest-free period.

The full details will be important. Household income and local property price caps are still to be confirmed, as are implementation arrangements.

Restricting the scheme to new-build homes can help stimulate additional supply, but it also narrows the choice available to first-time buyers, so its design will need to ensure it delivers genuine value for buyers as well as giving developers greater confidence to build.

Nor should Your First Home be regarded as the complete answer. Britain needs a healthy private rented sector and more social and affordable housing alongside a thriving owner-occupied market. People who aspire to homeownership should, however, have a reasonable chance of achieving it through their own efforts.

Lenders have already done a great deal to widen that opportunity. Higher loan-to-value (LTV) mortgages, longer mortgage terms, family-assisted products and more flexible approaches to affordability are helping borrowers with circumstances that might once have excluded them. Recent regulatory changes have also given lenders greater scope to support responsible borrowers without weakening lending standards.

Your First Home adds another important route, particularly for those for whom the deposit rather than the ongoing mortgage payment is the principal obstacle. But with a shortfall of around three-and-a-half million first-time buyers accumulated since the financial crisis, the scale of the challenge remains considerable.

The test of the government’s wider housing policy should therefore remain simple: does it give more people who want to own a home a realistic opportunity to do so?

We cannot guarantee today’s young adults the economic growth, pensions or other advantages enjoyed by previous generations. But we can give more of them the opportunity to build an asset and greater financial security for themselves.

Your First Home suggests the government has recognised that. The task now is to make sure this welcome first step forms part of a sustained effort to give the next generation a greater stake in homeownership.