Thursday, 17 August 2017

The Unfairness of the Grantham Baby Boomer’s £1,157,000,000 windfall? (Part 2)

Grantham Baby Boomers vs Grantham Millennials

Well last week’s article “The Unfairness of the Grantham Baby Boomer’s £1,157,000,000 windfall?”caused a stir. In it we looked at a young family member of mine who was arguing the case that Millennials (those born after 1985) were suffering on the back of the older generation in Grantham. They claimed the older generation had seen the benefit of the cumulative value of Grantham properties significantly increasing over the last 25/30 years (which I calculated at  £1.15bn since 1990). In addition many of the older generation (the baby boomers) had fantastic pensions, which meant the younger generation were priced out of the Grantham housing market with very little in the public pot to sustain their futures!

I replied there should be no surprise though that the older members of our society hold considerably more of our Country’s wealth than the younger generation. This is wealth which  has accrued across someone’s life, and reaches it’s peak usually at the point of retirement. If we are to comprehend differing wealth levels between generations we need to compare ‘apples with apples’. It is much more relevant to track the wealth held by different generations at the same age, ie what was ‘real’ wealth of the 30 something couple in the 1960’s compared to a 30 something couple say in the 1980’s or 2010’s.
Looking back over the last 120 years from various economic studies, the growth in wealth from one generation to the next one only occurred during a 30 year period of between 1960 and late 1980’s. Since the 1990’s, wealth has not improved across the generations, in the same age range.

Significantly in the last 10 years, UK households have saved on average 7.5% to 8% of the household income into savings accounts, compared to an average of 6% to 7% in the late 1960’s and 1970’s. The baby boomers haven’t been actively squirrelling away their cash for the last 30 or 40 years in savings accounts to accumulate their wealth. Most of their gains have been passive, i.e.  lucky bonuses gained on the back of massive property value rises or through their generation naturally living longer thus making final salary pensions more valuable!

..and herein lies the issue … it is assumed that these Millennials aren’t buying property in the same numbers like the older generation did in the past (because most of their wealth has come from house price inflation). The Millennials have often been described as ‘Generation Rent’, because they rent as opposed to buy property – because we are told they cant buy.

However, when Grantham mortgage payments are measured against monthly income, home ownership is affordable by historic standards because mortgage rates are currently so low. As you can see, the ratio of average house price to average earnings in Grantham hasn’t vastly changed over the last decade …

  • ·      2008 average house price to average earnings of a single person in Grantham  7.24 to 1 

  • ·      2017 average house price to average earnings of a single person in Grantham  8.38 to 1

(ie in 2008, the average house price in Grantham was 7.24 times more than the average person’s salary in Grantham and this has only risen to 8.38 in 2017 – and all this off the property boom of the early 2010’s)

95% first time buyer mortgages were reintroduced in 2010. The average interest rate charged for those 95% FTB mortgages has slowly dropped from around 5.5% in 2009 to the current 4% rate. However back in the 1980’s/ 1990’s mortgage interest rates were between 8% and 10%, and one time in the early 1990’s, reached 15%! The main difference between the two periods was the absolute borrowing relative to income is greater now than in the 1980’s. They call this the ‘mortgage to joint household income ratio’. In the 1980’s the mortgage was between 1.8x to 2x joint income; today it is an eye watering 3.4x to 3.6x salary.

The simple fact remains for the majority of first time buyers, it is still cheaper for them to buy a property with a 95% mortgage, than to rent it. The barrier for these Millennials is not servicing the monthly mortgage payments but finding the minimum  5% mortgage deposit in the first place.

Millennials make up 7,824 households in the South Kesteven District Council area (or 13.6% of all households in the area).  However, behind the doom and gloom, surprisingly, 40.2% did save up the 5% deposit and do in fact own their own home (that surprised you didn’t it!)

Nonetheless, the majority of Millennials in the area still do rent from a landlord (3,272 Millennial households to be exact). Yet, they have a choice. Buckle down and do what their parents did and go without the nice things in life for a couple of years (ie the holidays, out on the town two times a week, the annual upgraded mobile phones, the £100 a month Satellite packages) and save for a 5% mortgage deposit .. or live in a lovely rented house or apartment (because they are nowadays), without any maintenance bills and live a life with no intention of buying (because renting doesn’t have a stigma anymore like it did in the 1960’s/70’s. (secretly hoping their parents don’t spend all their inheritance so they can buy a property later in life – like they do in central Europe)

Neither decision is right or wrong – although it is still a choice. Until Millennials decide to change their choices – that is the reason why the Country’s private rental sector will continue to grow for the next 30 years – meaning happy tenants and happy landlords.

Thursday, 10 August 2017

The Unfairness of the Grantham Baby Boomer’s £1,157,000,000 windfall? (Part 1)

At a big family get-together recently I got chatting with one of my second cousins who I hadn't seen for a while. Indeed the last time I saw them, their children were in their early teens. Now the children are all grown up with partners, children and even dogs of their own. Wow – how time flies!

So, I got talking over a glass of lemonade with my 2nd cousins and a couple of their children, about the times of 15% interest rates and how the more mature members of our family had to endure the 3 day week, 20% inflation and the threat of nuclear annihilation in 4 minutes. Foolishly, I said with all the opportunities youngsters had to day, they never had it so good!

Trust one of my cousin’s children to have some financial / economics qualifications before going to Law School! They argued that the economic prospects of their Millennial generation was far worse than anything ‘we’ had experienced! After all they had to suffer student debt, unemployment, global proliferation, EU migration and rising house values. These issues combined created a negative outlook for ‘their’ generation, which has created an unparalleled disparity of wealth between the generations. So of course I asked why that was?

They said Millennials were paying the price for the UK’s most spectacular bookkeeping catastrophe to date (bigger than the Bank bailout after the Credit Crunch). Back in the 1950’s and 1960’s, nobody predicted so many Brit’s would live as long as we do today. The modest retirement  pensions that were promised in the past (be that Government State Pension or Company Final Salary Schemes), are now burdensomely over-lavish. Putting it simply they are ‘hurting’ the Millennials of today and will do so for the years to come

Bringing it back to property, the young 2nd cousin (once removed ‘soon to be’ lawyer), considered the baby boomers born between 1945 and 1965 as the significant beneficiaries of the rising house prices over the 1970’s / 80’s / 90’s and 2000’s. Add to that, their decent pensions, means their wealth has grown exponentially more through the luck rather than skill or endeavour of a generation.

This disparity of wealth between the older and younger generations could have unparalleled consequences for the living standards of younger Millennials…. So Houston Grantham – do we have a problem??

Well Grantham Property Blog readers, you know I like a challenge. I can’t disagree with some of what the younger family member said, but there are always two sides to every story, so I thought I would do some homework on the matter

Since 1990, the average value of a property in Grantham has risen from £57,900 to its current level of £169,200. Given there are a total of 10,425 homeowners aged over 50 in Grantham, that means there has been £1.15bn windfall for those Grantham homeowners fortunate enough to own their own homes during the property boom of the 1990s and early 2000’s.

I must admit the growth in property values in the 1990’s and 2000’s certainly helped many of Grantham’s baby boomers. The figures do appear to put into reverse gear the perceived wisdom that each generation gets wealthier than the previous one  … and so with all this wealth, the figures do back up the youngsters argument that Millennials are being priced out of home ownership.

Or do they? Are they?

Next week, I will carry on this discussion where I will give the Baby Boomer’s defence to the prosecution’s case!

Wednesday, 9 August 2017

The Grantham Property Market, The Beatles, Sweden and 50 year mortgages

50 years ago, in 1967, the first human heart transplant was performed by Dr Christian Barnard in South Africa. In the same year Sweden switched from driving on the left-hand side to the right-hand side of the road. The average value of a Grantham property was £2,134, interest rates were at 5.5% and the Beatles released one of my favourite albums – their Sgt Peppers album .. but what the hell has that to do with the Grantham Property Market today?? Quite a lot actually... so with my CD Player turned up loud –  let me explain my friends!

I have been doing some research on the current attitude of Grantham First timer buyers.  First time buyers are so important for both landlords and homeowners. If first time buyers aren’t buying, they still need a roof over their heads, so they rent (good news for landlords). If they buy, demand for Grantham property goes up for starter homes and that enables other Grantham homeowners to move up the property ladder.

First-time buyers are the life blood of the property market. They are however the most susceptible to interest rates rises and the affordability of mortgages. With that in mind, let us see what is happening to them….

The average value of a Grantham property standing at £167,800 and UK interest rates at 0.25%. As each year goes by, it appears the age of the everlasting mortgage has started to emerge, prompted by these first-time buyers, eager to get a foot on the housing ladder. I was reading a report a few days ago where some mortgage companies confessed that the battle to gain big returns from the property market has led to mortgages that will take considerably longer than the customary 25 years to pay off.

Over the last few years, it has been common place for first time buyer mortgages to be 30 and 35 years in length as the ‘Bank of Mum and Dad’ have been helping with the deposit (Beatles Sgt Pepper Song - “With a Little Help from My Friends”). Now, some High-Street banks are offering of mortgage terms of 40 years. This means first-time buyers could be paying until their mid 60’s – I can hear that other great track from the same album "When I'm Sixty-Four" ringing in my ears! So, a 50-year mortgage does not seem as far-fetched now as it would have been back in the 1970’s. After all life expectancy for a male then was exactly 69 years and today its 79 years and 5 months!

Over the last ten years, Grantham property prices have continued to rise more than wages, therefore first-time buyers are looking for bigger loans. If this development continues, the only way repayments can remain reasonable is by increasing the term of the loan.

However, some commenters have said there are worries the mortgage companies are lending money over such a long term, they threaten leaving some first-time buyers with a generation of debt if the house price bubble bursts.  Interestingly, when I looked at what had happened to average property values in Grantham over the last 50 years, there have been bubbles. First-time buyers should take heart, since as a county we have always recovered from it a few years later.

What if interest rates rise? Well looking at historic UK interest rates, the current rate of 0.25% is at a 300-year low. Mortgages will never be cheaper. I would however, seriously consider fixing the rate to cushion any future potential interest rate rises (since they can only go in one direction when they do change). If Grantham first time buyers see buying a home as a long-term decision, based on the last 50 years, they should be just fine!

Before I go, have a final thought from property buyers in Sweden, the land of Volvo and Abba. As Swedish property prices are so high, Swedish Regulators announced last year limits on the length of Swedish mortgage terms. They don’t bother with 50 year mortgages (On and On and On – Abba).

No, our Volvo loving Swedish friend’s average mortgage length is 140 years (this is not a typo). Although such mortgages have had their Waterloo (Abba), regulators have significantly reduced the maximum term of a Swedish mortgage to 105 years. Either way, that’s a lot of Money Money Money (Abba again – Sorry!)  to pay back!

Now I will leave you in peace as I listen to the 1980’s Madness song ‘Our House’. My apologies to all the Beatles and Abba fans in Grantham – a bit of light hearted fun albeit on serious topic.