Rising UK house prices and dwindling salary growth for the younger generations, leaves a troubled outlook ahead.

I have heard a lot recently about people thinking the millennial generation, and all subsequent generations, are fickle, lazy and frivolous with money. Many think we should be saving for houses rather than going on holidays and buying avocados.

Generation Millennial, X, Y and Z...more like generation F’d

The title above might seem extreme, but I wanted to explore this in relation to a few different factors. House Price Cost, Relative Salary Growth in % and the cost of a university education, all over a range of years. Hopefully this will highlight, if our younger generations are really the frivolous layabouts or that even if given our best efforts the likelihood of success is so stacked against us the only relief is to arrange a quick trip to Benidorm drink 1 euro beer and eat Avocado on toast.  

This will involve a few graphs…

Comparing house prices to average salaries

FIRSTLY: I want to compare the cost of houses relative to the UK’s average salaries.

Anyone born in the mid to late 1900’s and beyond have only ever known a house to be 7/8 times the average salary in the UK. (This is much worse in London, where house prices are up at around 10/11 times the average salary).

Now it is a well known fact that banks can lend on average 5 times your salary. This means that either you have to buy as a couple to achieve the loan potential to buy (2 x 5 times your individual salaries) or if buying as a single individual, you have to front up the difference in a deposit. This would be in the order of 2/3 times the average UK salary. In 2017 the average UK salary was £26,260, that means an individual would have to save between £52,520 - £78,780. (Now i’m not sure about you, but that sounds like a lot!!!)

In real terms, the average UK salary allows £1600 a month disposable income. If you saved on average a 3rd of your salary (at circa £550). It would take between 8 - 13 years to save to this. Interestingly enough as buying a house gets harder for single individual, figures released by the office of national statistics show that the proportion of single individuals is steadily rising.

Now I won't go into the social reasons as to why this is, but it does mean that more and more individuals are left trying to find £52,520 - £78,780 to get on the housing ladder.

Finally, £550 a month of savings may not seem like much to some, but a recent survey by the Guardian suggested that up to 70% of individuals struggle to put away any money at all and 30% living to the bread line.

Rising house prices versus yearly salary growth

SECONDLY: I want to look at the cost of houses relative to salaries, against average percentage salary growth over the years.

As we already know, house prices are high, but as you can see from the graph above they have been increasing in price as salary growth year-on-year has been decreasing and is currently at around 2.7% (average over the last 15 years). This is just above inflation meaning this gap will never get easier to bridge.

At present, house prices are at a critical point in value - 10 times UK average salary (the max a couple can borrow). In my opinion, this leaves no room for continued housing price growth, unless salaries increasing but this doesn't look like this is going to happen or the banks decide to over lend…but they would never do this being responsible and respected corners of  business (#2008). I know i’m not a housing expert but a recent RICS report supports my ideas, if not being a bit more negative than me.

Since the 1970’s the UK has enjoyed continued property price growth, which has made property a good investment. With the expected plateau in property prices, it is likely that the Millennial and subsequent generations will not see the return in investment past generations have seen.

Therefore, I would argue that, at present, housing is a poor investment. Our younger generations are unlikely to make money from their property investments but it is a better option than paying rent. A little fact on this as well, a recent report by The Association of Residential Letting Agents highlights how people in the UK are likely to spend on average £64,400 on rent before being able to buy!

Crippled by debt for the pleasure of attending university

THIRDLY: University tuition leaving individuals in a never ending debt cycle, limiting their saving ability.

Before 1998 university tuition was free. Tuition now is capped at £9000 a year for English residents. This now leaves a university leaver with £27,000 worth of tuition debt, plus maintenance loans of an average £9000 per year which comes out again at £27,000 over the course of your three year university degree. This gives a grand total of £54,000 of debt for those individuals who started university from 2012 onwards...

CONCLUSION:

• Millenials are better off than X,Y and Z. If you are a Millenial you likely came out of University with £39,000 of debt, X,Y & Z came out with £54,000….
• It is likely to take 8-14 years to save the £52,520 - £78,780 deposit you will need to buy a property if you are earning the UK average wage and can save £550 a month.
• With some reports suggesting 70% of individuals are struggling to save anything each month, buying a house could be untenable for many. If you are in a couple and earning well, then you could get there.
• During the time you are saving you are likely to spend £64,400 on rent, if you’re one of the lucky few who buys as a couple or saves enough to get out of the renting market.
• Of the few who do manage to buy a property, we are now moving into a very poor time for the housing market with considerable uncertainty. There is now a good chance that your property won't make you anywhere near the money our parents’ generations enjoyed.
• With ISAs offering  1% - 1.5% on average, it is hard to see where to invest your money as a millennial or identify where we will find the capital to have a comfortable pension.

Therefore I argue for a lot of young people they are faced with perpetual renting with a poor outlook for their investments for the future. So spending money on £60 flights to drink German beer and £2 avocados is probably justified, as pretty much everything else is out of reach.