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Credit crunch extends to first time home buyers as Gen Z goes for stocks

Andrew Saks, Monday, 10 May 2021

There once was a time during which the British public were intent on owning their own homes.

Between the years 1950 and 2000, the United Kingdom was one of the top nations in the world for percentage of owner-occupied homes, a remarkable feat for a nation with over 60 million people of all levels of income.

Since the rise to adulthood of people born in the 1990s, however, two things have diminished, those being the ability to purchase a home via a mortgage, and the actual desire to own one.

The baby-boomer generation had access to easy credit, and lending institutions gave relatively low risk loans to full time employees, who often at that time earned only a modest income but had a secure job for life.

Today, things are vastly different. The gap between the 'haves' and the 'have nots' has increased tremendously over the past twenty years, and gone is the plodding, anodyne-but-secure job for life dynamic.

The average time spent today by the average employee in a salaried position is two years across all sectors of industry in the United Kingdom. Add to that the array of zero-hour contracts which do not provide lenders with enough proof of guaranteed income upon which to base a 25 year loan, and the higher than ever number of self employed freelancers, and the traditional mortgage system appears completely outmoded.

Those who plodded along in the same job for over 40 years and tolerated mediocre salaries underneath a very low glass ceiling in return for a final salary pension and two weeks paid leave every August which could be utilized by towing a fiberglass box with a chemical lavatory behind a hospital-bed-beige Austin Montego with brown dralon upholstery did so unassumingly as they had been sold the idea that accepting this mediocrity was worth it in order to pay a mortgage and retire with an equally beige 1950s three bedroom house, which had been peddled as an 'investment'.

Perhaps in some regions of the UK, houses have been investments. Some degree of returns have been made in areas which were initially affordable and have become desirable, and London of course has been home to several million investors who did not acquire property to live in, but to use as a second source of income via the rental market, or to renovate and sell at a high profit during the boom periods over the years.

To many highly educated and successful young people, however, property is no longer being viewed as an investment.

That's because often, it isn't one.

When looking at the collective thoughts of many under-30s, many are not remotely bothered that the banks won't lend them an absolute fortune that they will have to pay off for the rest of their careers for a tiny house that will only increase moderately in value over a long period of time, if at all.

 One well known commenter whose audience is all post-graduate age last week spoke out by saying "Buying a house is a major financial decision that can give you peace of mind and a wonderful place to live. But it's not an investment."

He addressed his young audience by saying that the home that a person lives in is not an investment. That’s not necessarily saying that anyone should avoid homeownership, but if leaning towards buying because it is perceived as a smart investing, think twice.

The idea that your primary residence can be an investment comes from the fact that, historically, real estate values rise. It’s likely that we all know someone—a parent or grandparent, perhaps—who bought their home decades ago for less than £10,000, and it’s now worth many times that sum.

In many cases this has not moved anywhere near the direction considered by most property salespeople, and if there is a slump in the economy, owners are left with unsaleable homes and monthly payments that need to be made.

Most investments do not require 25 years of monthly payments with interest. More significantly, when you do sell, you will most likely have to use the equity from the sale to purchase the next house, plus potentially increase the mortgage, and now, as the recession hits, mortgages are becoming even harder to obtain from lenders.

A study by Aldermore Bank in which the number of British people attempting to buy their first property has just been released, and it has shown a huge decrease compared to last year, when nearly half said they had been able to get a mortgage on the first attempt.

As reported before in today's Vlog, unsecured credit is now almost impossible to obtain, even with a previously clear and perfect credit rating, and now the lenders are scaling back on their mortgage business.

The report shows that in March 2020, 19% of first time buyers had their mortgage applications rejected due to poor credit, whereas in March 2021 that has risen to 41%.

Lack of deposit has risen from 19% to 39% among first time buyers, hardly surprising as that is the age group that has suffered the most from job losses during the lockdowns.

Risky high interest payday loans, an instant turnoff for lenders, have risen as a reason for mortgage declines from 12% last year to 29% this year, and making a lot of applications for credit has rocketed among young people.

Thus, a change of direction is definitely here and the younger generation do not see a physical asset with a limited market which requires endless debt in order to finance its purchase as an investment, and to a certain extent they are correct.

Buying something with finance is not an investment. An investment is using one's own capital to purchase or trade items in order to gain a higher price when selling.

This is why younger people are turning to alternatives such as electronic trading. It does not require indebtedness, and the debt-based economy is definitely obsolete in today's world.

A quick glance at discussions on special interest forums such as Reddit will bear this out also. "Long term, housing tracks inflation, stock markets do a lot better" says one commenter, with many echoing this view.

 With rental yields for new apartments in London now at around 2%, which can run into negative figures if the apartment is mortgaged and a management company has to be paid to maintain it and perform tenant-facing roles, whereas stock market volatility is up, and it is not a market in which investors have to pay for 25 years or lose their home.

That is perhaps why there is no uproar from the under 30s as a result of this. Perhaps the old system is, well, old.


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