The UK once considered home ownership the norm. For my generation, and the generation before, the clamour to get on the property ladder was natural and continuous. But economic changes since the 2008 financial crash have ripped up the home ownership rule book.
In 2017 The Guardian reported that workers in the UK saw their wages fall by 1% a year in the period following the 2008 crisis¹. Alongside wage deflation, house prices have continued to steam ahead at an unrelenting pace until this year when the brakes began to be applied. Many people are predicting doom and gloom for the future but I believe that periods of difficulty often produce the brightest innovations to overcome challenges we face.
So what does the future look like?
Is home ownership still accessible?
What can the industry do to help?
The economic argument for home ownership
Research shows that the average price of renting a property is now higher than average mortgage repayments in every region of the UK2. The average rent now stands at £912 per household, compared to average monthly mortgage repayments of £723 for first-time buyers. On the face of it, renting a property does not make financial sense. Your cost of living increases and you are not investing in an asset that could benefit you in the future.
This is Money examined the returns of different asset classes over a thirty year period, and the value of property not only as a home but also as an investment was evident. The stock market yielded an annualised return of 9.9% (with dividends re-invested) and 5.9% (without dividends re-invested). By contrast, the returns of residential property were 5.7%3.
While we know that past performance is no guide to future returns, the economic argument for owning your own home may never have been stronger. Aside from the economic benefits, many studies claim that being grounded in a community in a home you own enhances wellbeing.
The largest obstacle that many people face, especially first-time buyers, is the deposit. According to a BBC study4, in most regions it would take about eight years for the typical buyer to save for a deposit. This rises to nine years in the South East of England and nearly ten in London. Many young people look at a time horizon like that and simply lose hope if they are unable to draw upon the ‘Bank of Mum and Dad’.
The financial commitment of a large mortgage can sometimes outweigh the psychological benefits of being part of a community and owning your own bricks and mortar. However, no real conclusion can be drawn about these two conflicting sides of the same coin and each person would feel differently.
Nonetheless, the idea of buying a house when you’re 20, moving once in your life and maybe clearing your mortgage in your mid-forties is less achievable than it once was.
Home ownership has not suddenly become a bad idea but is no longer the simple matter that it once was. I believe that the industry needs to take a fresh look at how we are supplying financial services to people of different ages, and how we can help them to achieve their aims of owning a property. I believe the industry used to be constrained by its IT systems, which meant that services could not be offered flexibly. This is the primary reason why at Saffron Building Society we have invested in our infrastructure. This will enable us to create products around the needs of the individual, rather than lining up a set of items to choose from like food in a supermarket.
Migrating to a new IT platform is risky and costly. You only need to look at the pain experienced by TSB. Thankfully, we are through that now and positioning ourselves to innovate in the market. But what will the future look like?
I think a number of themes could dominate in the coming years.
A Mortgage for life
People will adapt to the fact that they will be paying a mortgage for longer than the 25 years that our parents expected. 40 year mortgages will be more common and maybe there will be some life long mortgages. In the same way that some students never expect to pay off their loans, mortgages could go the same way.
However, the housing assets gained will be worth much more than those of our parents, and could be the source of income for retirement or for the housing of future generations. Equity release acquired a terrible name just over 20 years ago, however the world has moved on and it’s a real option for people today. I expect that product development based on needs rather than short-term income will produce major areas of innovation in this space.
Mortgages will no longer be a product on their own. Currently, home owners are always looking for the best deal and switching between products. This is time consuming, and also expensive for the lender.
As Open Banking provides more context and analysis of people’s lifestyles and expenditure, lenders will understand better who they are dealing with and be able to offer bespoke pricing. This will reward loyalty and prudence and customers won’t need to look around so much. The churn costs of managing a mortgage book that is constantly revolving will be reduced. Lenders could be in a position to reduce the costs.
This change could feel like a threat to brokers. After all, their purpose at present is to hunt out the best deal for their customers on a regular basis. However, I think the role of brokers could change as they too evolve into genuine financial planners, helping the nation’s home owners plan their finances. A forty to fifty year time horizon will become the norm rather than focusing on a product for the next couple of years.
Financial planning legislation has failed in recent years, with the unintended consequence of removing advice from the reach of the mass market. Only the wealthy now have access to good advice, but as the complexity of financial arrangements increases, I suspect the regulator will re-think the approach. This will open up a new segment for those with skills and experience in financial advising.
I see a big role for brokers in the future as they look to build long-term strategies for people outside the usual constraints of product selection. And I think they will thrive in an environment where lenders and brokers share more data and collaborate on designing products for complex needs.
When will this future arrive?
At Saffron, we are planning for the future right now. Many commentators I read create headlines by proclaiming that rapid and fundamental shifts are just around the corner. Experience tells me that change in industry often happens more slowly than people predict, but that shouldn’t be reason to wait. I believe that planning to be at the forefront, rather than lagging behind, pays dividends in the long term.
Chief Executive Officer, Saffron Building Society