LONDON: The property ladder that has helped generations of young Britons achieve wealth and stability is breaking down.
Rising service fees on apartments and a tight market for homes have left many millennials stuck in place or falling behind.
Shenali Jashani and her partner thought they were setting themselves up for life when they bought their apartment in west London five years ago.
They planned to stay for a few years, then use the equity to buy a house outside London once they were ready to have children.
“We were really proud that we had saved the money,” the 32-year-old management consultant said.
That plan hasn’t worked out the way they expected.
Escalating service fees and charges on the apartment made it difficult to sell when they tried to move last year.
Estate agents pressured the couple to drop the price so low that affording a house to move into would be a struggle.
They ended up taking the flat off the market, spending thousands of pounds to cap some of the fees and are trying again to sell for at least £355,000 (US$477,000), the amount they paid.
But when Jashani did the sums, she realised they’d be better off now if they’d just continued to rent.
“We did everything that you’re supposed to do,” she said. “I don’t want to regret it, but it’s really hard to not feel angry about the whole thing.”
Britons, like Americans, are obsessed with home ownership.
Buying property represents not just shelter and stability, but also financial security, and the vast majority would rather buy than rent. Average home prices rose by 263% across the United Kingdom and by 507% in London between 1996 and 2016.
For those lucky enough to have bought in time, the uplift in values created millions of pounds in property wealth and has allowed many to graduate to larger and more valuable homes.
Property wealth makes up 40% of United Kingdom’s household wealth, much of it held by older generations.
The picture has changed in the last decade, especially for Londoners, apartment owners and first-time buyers of smaller properties.
In the leafy, semi-suburban parts of outer London where many young professionals buy their first homes, flat prices dropped by 5.5% since January 2020, while house prices have risen by more than 10%, according to an analysis by Knight Frank, an estate agency.
As a result, millennials, the generation born in the 1980s and early 1990s, are finding that moving onto the next stage of home ownership is unexpectedly difficult.
Apartments in England and Wales are usually leasehold, an arrangement in which the purchaser, or leaseholder, effectively buys the right to live in a property for a set number of years.
They can sell that right, but the freeholder remains the “real” owner of the property and usually charges fees for its upkeep.
The second property-ownership step is often a leap from leaseholder to freeholder, which usually means more control over costs and more stable property values.
“For many millennials, the housing ladder has stopped working,” said Conor Nakkan, senior researcher at the Intergenerational Foundation, a UK think tank.
“Flat prices have stagnated, moving costs are high and the larger homes they might once have expected to move into are often out of reach.”
The market for houses has overtaken the apartment market for a host of reasons.
A glut of apartments has hit the UK market in the past two years, as new, tougher regulations around property-letting have prompted many landlords to sell up.
Some tax breaks and other government incentives for first-time buyers have been removed or reduced, while others cap the value of properties they can be used for, severely limiting their utility in the expensive London market.
A Lifetime ISA, a tax-efficient savings wrapper that allows holders to put up to £4,000 a year towards a first home (topped up to £5,000 with a 25% government “bonus”), can only be used on homes worth less than £450,000, well below the average asking price for a London apartment.
In addition, the aftermath of the Grenfell Tower fire, which killed 72 apartment dwellers in west London in 2017, left thousands of homeowners in legal and financial limbo over who was responsible for ensuring their homes were safe from similar accidental blazes.
Mortgage lenders refused to lend to apartment owners in buildings deemed at a higher-than-acceptable fire risk.
Building owners were often slow to pay for costly repairs and safety upgrades, while a shortage of surveyors to inspect and certify buildings also caused delays.
Spiralling fees and unfair terms set by freeholders or their property managers can also make selling up more difficult for apartment owners.
Opaque or unreasonable charges increase the financial burden of leasehold apartments, reducing their value and putting buyers off.
The UK government has announced plans to cap these charges and give leaseholders more control, but most of the overhaul is yet to take place.
“All this talk about reforming leasehold but it not actually happening yet is really putting a damper on the market,” said Paula Higgins, chief executive officer of Homeowners Alliance, an advice and campaign group.
Amber Needham, 29, bought her first home nearly five years ago, about 20 miles outside London.
She sold the one-bedroom apartment in Dartford, Kent, for £162,000 earlier this year – £7,500 less than she paid for it, even after successfully campaigning to change her building’s managers due to their extremely high service fees.
The experience was “really upsetting, to the point I actually just started to resent the flat so much”, she said.
Needham is now renting. “It almost feels like I’ve gone backwards in life.”
Higher interest rates are also weighing on the property market for prospective buyers.
In December 2021, the average mortgage rate for a buyer with a 10% deposit, fixed for two years was 2.51%.
Now it’s more than 5%. That’s a particular problem for would-be home buyers with big mortgages and small deposits.
Stamp duty, the upfront tax charged in the United Kingdom when you buy a property, has also risen.
That all means there are fewer purchasers, with less buying power.
“Normally what you find, in a strong market, is that the buyers are competing for property,” said Lucian Cook, head of UK residential research at Savills, an estate agency. At the moment, “the property is competing for buyers”.
For would-be “second-steppers”, the bottleneck in the housing market means delaying life milestones like having a family, which is distressing. Childcare costs in the United Kingdom are among the world’s highest, eating up about 25% of household income on average.
Space is another issue: The average 670 sq ft London apartment is not necessarily the ideal set-up for children.
In Britain’s capital city, making the jump from a two-bedroom home to a three-bedroom one costs about £234,000 more on average, a Savills analysis from March found, and roughly an extra £15,000 a year in mortgage costs (based on a 25-year mortgage at “prevailing” rates).
Many young parents cope by moving out of the city and closer to family who’re willing to help, but that strategy is harder to implement in a sluggish property market.
Birth rates have fallen to record lows, and are falling faster than average in London.
Sitting tight until market improves is one option, said Tom Bill, head of UK residential research at Knight Frank, but there’s no obvious sign a turnaround is imminent.
Conflict in the Middle East and political instability in United Kingdom are threatening to keep interest rates higher for longer.
“Hopefully, things will become clearer over the next couple of months,” Bill said.
“There’s a lot to weigh up. But some people can’t think about their timing too much, because they need to move.”
That is the dilemma faced by Sam Shaw, 31, who tried to unsuccesfully to sell the two-bedroom apartment he and his wife own in southeast London earlier this year. — Bloomberg
