Avoid avocado toast. Ditch the flat white. And turn your back on the lure of Instagrammable holidays. Over the past decade, millennials have been ordered to scrimp, save and toil to get on the property ladder. Cutting out small luxuries won’t have helped much in the pursuit of home ownership. But for those who managed to buy a home in recent years, there is a fresh insult.
In Britain’s exploding mortgage timebomb, young adults are paying the heaviest price – exposing yet again Britain’s widening generational gulf. As the Bank of England whacks up interest rates to save the nation from the highest inflation rates since the early 1980s, it is those who hadn’t even been born then who carry the heaviest burden for bringing it down.
According to the Institute for Fiscal Studies, the increase in monthly mortgage payments awaiting 20- to 40-year-olds will be about twice as large as the rise for those over the age of 60. For millions more who rent, the prospect of home ownership is drifting further from reach, as their (typically older) landlords either sell up, or inflate rents at the fastest rate on record.
As with each of the last three big economic shocks to hit Britain – from the 2008 financial crash to the Covid pandemic and cost of living crisis – the nation’s younger generations have been sold down the river, forced to endure stagnant wages, crumbling job opportunities, the rising cost of education, the dismantling of generous company pension schemes and housing penury. It is hardly any wonder that millennials – broadly defined as those aged 25 to 40 – believe the Tories deserve to lose the next election.
For all the headlines of the past fortnight about mortgage misery and financial pain, it’s worth remembering that a sizeable chunk of society will see little or no impact – having either already paid off their mortgage, or had the wealth or good fortune never to have had one.
More households in England and Wales are in this position than have a mortgage, with as many as 8.1m, or about a third of the total, being mortgage free. Instead, the full force of the Bank’s toughest rate-hiking cycle in decades is reserved for the 7.4m with a mortgage, alongside 5m private renters, and 4.2m social tenants.
In some parts of the country more than half of homes – largely in wealthier rural or suburban areas with older demographics – are owned outright. For north Norfolk, east Devon, the Staffordshire Moorlands and Castle Point in Essex, the exploding mortgage crisis is nowhere near as acute. By comparison, less than a quarter of homes are owned outright in cities such as Liverpool and Newcastle, with the smallest proportions in London, where property prices are highest.
This isn’t to say that older generations will escape entirely, nor that everyone born after 1982 is equally affected. The bank of mum and dad has become a more important route to home ownership than hard work for many, while most under-30s living away from their parents do so in private-rented homes.
However, past episodes of the central bank cranking up interest rates to crush inflation would have had a far more even impact across society. Today, entrenched and worsening inequalities have blunted the power of monetary policy.
Back in 1989, almost 40% of households owned a home with a mortgage, and were therefore exposed to rising costs, according to the Resolution Foundation. Today, as more older people own outright, and more younger adults rent, the share of households with a mortgage is below 30%.
Millennials are half as likely to own a home at the age of 30 as baby boomers were, after a more than tenfold increase in house prices since the early 1980s – leaving the average first-time buyer requiring a deposit 10 times larger than four decades ago.
Older generations might have faced considerably higher interest rates during the inflation-prone 1970s and 80s, when interest rates peaked as high as 17%. But their mortgage costs were still often more affordable than today. Homeowners then benefited from average house prices of below £60,000, about three times annual income, as well as from tax breaks on home loan payments through the government’s now defunct mortgage interest relief at source policy.
With house prices averaging £285,000 today, or about eight times the average income, smaller interest rate hikes than in the past will have a more painful impact. In the past decade alone house prices have risen by more than two-thirds, meaning more recent buyers are likely to have larger debts, leaving them severely squeezed.
The good news this time around is that mass home repossessions and the pain of negative equity for millions is unlikely, thanks in part to tougher mortgage regulations introduced since the 2008 financial crisis. However, higher interest rates will add almost £16bn to mortgage payments in aggregate, forcing borrowers to make vast cuts elsewhere to keep a roof over their heads.
For the economy at large, the scale of belt tightening required will probably tip the country into recession. In turn, should more businesses fail, job losses mount and wages stagnate, it will be the working-age population and those just entering the workforce for the first time who face the most hardship.
There is a clear political opportunity. After the parade of economic shocks borne mostly by younger generations, it is time for politicians of all parties to wake up and tackle the yawning divide. Britain’s worsening problem with generational inequality will persist without action.
