14 March 2018
A recent report found that the average 20% deposit in London is approaching six figures, up £30,000 in ten years. It takes nearly 10 years for the typical buyer to raise the money, increasingly difficult as real earnings are falling for young people and savings rates are low. The picture is slightly better outside London, but not much.
Which begs an important question, one which more and more under 40 are asking: why bother?
It may have seemed like a sensible move when you had a decent chance of making chunky returns from your home. But after 20 years of rising property prices – which now sit at 7.6x average salaries - that is a bit more of a gamble. ONS data shows that the median price paid for a home rose 259% between 1997 and 2016, while earnings rose only 68%.
Today, in certain parts of London, prices are falling. Average agreed discount to asking prices has grown from 0.5% in 2014 to 4% today, with discounts of up to 10% registered in inner London. This does not seem the most opportune moment to make such a huge financial commitment.
Global citizens and an alternative view of work
The next generation are global citizens. They want to go where their work takes them, having the freedom and flexibility to begin a new life in a new country. Property ownership is fundamentally in conflict with this. Houses take time to sell, or rent; they are difficult to manage, things need mending, costs can be unpredictable and high.
Real Life Story: Mikhail, London:
“My friends and I graduated into the 2008 recession, we have developed alongside the rise of the UKs start up scene, and the gig economy. Our outlook to work is quite different from previous generations, with many of my peers seeking the flexibility to go wherever the work is. The concept of being a corporate lifer is very foreign to most of us. Many of my friends say that the idea of surrendering their savings to a huge deposit and being encumbered to the cash flow demands of a mortgage actually feels like a compromise on their freedom to follow employment demand in their field.”
What else could you do with that deposit, even while you're saving?
Invest it to create an income
If you put your savings into collective investment funds that pay dividends, you can create an additional income stream for yourself. Equity income funds pay around 4% (though the income is not guaranteed), giving you an extra income of around £3,200 per year. You may even get some capital growth if the stock market rises. If you keep this in an Isa, it is all tax free. See our recommendations here.
Put it in your pension
Increasingly it is becoming clear that millennials may have to make a choice between saving for retirement or saving for a property. Failure to prioritise one over the other may compromise both goals. Maxing out a pension pot may be a more realistic option. You are incentivised by the government to do so with decent tax breaks on offer. First thing to check is whether you have a workplace pension (you should have) and to max out savings into that. Then consider opening a personal pension – here are the ones we like.
Other investment options
The past decade and technological developments have brought a lot of alternative investment options more in tune with the average millennial mindset than some tedious belt-and-braces guy in a suit telling them to invest in BP:
Given low interest rates, having the flexibility to invest in a broad range of investment options is distinctly more appealing than throwing it all into an inflated house deposit.
Imagine buying a house near a good school, only to find that the catchment area has shrunk and suddenly your house isn’t worth what it was because it no longer has the ‘good school premium’. How much easier is it to rent a place and ensure that you are in the right area for schools?
Real Life Story: Amaya, Bristol:
“There is this idea that you’re somehow a failure if you rent. I don’t see that – we’re in our late 30s. Most of our friends are renting and for everyone else, owning a home seems to bring nothing but stress.
“As renters we are completely free. We are just in the process of moving to a beautiful spot, just near a fantastic school for my son. Imagine if we owned a place – we’d have to sell up, go through all the buying process, pay stamp duty. It would be a nightmare.
Maybe we will buy one day, but scrimping and saving for a deposit on a crappy house somewhere we don’t want to live? I prefer it our way.”