Why would you buy a home? The obvious answer, surely, is that you need to live in it. But homeownership is not as logical an endeavour as it ought to be.
Since the expansion of mortgage lending in the 1980s and 1990s, many people have bought their homes as “investments”, assets which they hoped would appreciate in value. And, because house prices have continued to outpace earnings in this country, for a long time they were right to do so.
Between 2008 and 2020, even though house prices fell in the immediate aftermath of the financial crisis, the overall trend was that they rose by around 50 per cent on average. This increase was worth hundreds of thousands of pounds to homeowners in particularly “hot” markets like London and the South East.
After 2008, mortgages were also much cheaper due to ultra-low interest rates.
Today, though, buying a home in most parts of the country is unlikely to make you rich. This is because house prices are now at near-historic highs and new buyers find themselves taking on greater and greater amounts of debt to become a homeowner in the first place.
The average home now costs around nine times the average person’s income. In the 1990s, it was closer to four times.
As Chancellor Rachel Reeves’s stamp duty changes loom, house prices are rising more than anyone expected. This could be because buyers are racing to complete sales before 1 April, when first-time buyers will pay stamp duty on homes from £300,000 and those buying additional homes will pay a higher rate, and have thrown money at sellers to do so.
Between January and February this year, house prices rose by 0.4 per cent, taking the average cost of a home to £270,493. The typical house price is now 3.9 per cent higher than it was in February last year. That means the annual growth rate is slightly down from 4.1 per cent in January but still higher than anyone expected given the backdrop of higher interest rates.
Some estate agents argue house prices rising shows that the market has recovered from when interest rates began to rise after the pandemic.
However, this data tells a far more complicated story.
Rising house prices mean that there is no chance buying a home will become more affordable for people who do not have enormous amounts of cash behind them for a deposit in the short term or, perhaps, even medium term. Indeed, both the property listing site Zoopla and estate agency Savills expect house prices to keep growing (steadily as opposed to sharply) throughout 2025.
A consequence of the heady combination of high house prices and higher inflation rates that have become the new normal means those who do buy homes are paying more and often taking on more debt.
Once you factor in costs associated with owning a home like insurance and repairs, this can mean homeowners have less disposable income than they once may have done. And, crucially, those who’ve bought at the top of the market with small deposits will have little equity to draw on if they need to.
The Bank of England’s latest data shows that the net borrowing of mortgage debt by individuals increased by £0.9bn to £4.2bn in January, following an increase in net borrowing of £1.1bn in December. We also know that average mortgage terms are getting longer, stretching from 20 to 25 years to 30, 35, and even 40 years.
In and of itself, this higher borrowing for longer isn’t necessarily a problem. As long as those buyers who take on bigger, more expensive mortgages can afford to repay them over time, and house prices don’t fall dramatically (unlikely), nothing terrible will happen to either homeowners or the housing market.
What it does signal, though, is that homeownership has changed. It is time to reframe the way we think about buying a house.
Owning a home with a capital repayment and interest mortgage will still mean you own an asset at the end of your loan term. But if buying a home in the 1980s, 1990s, 2000s or 2010s was a long-term “investment” on which you could expect major returns in most parts of the country, today it is a long-term financial commitment on which you will pay significant interest for longer, but are not guaranteed to make an enormous amount of money from.
This could mean today’s young homeowners have less cash to play with in retirement and, crucially, less to hand down to their offspring (if they even have children).
Think of buying a home today like buying a luxury item on finance. You get to live in it, you can expect it to retain its value and, maybe, even be worth a little more when you pay off your loan. But don’t gamble your future on it going up significantly in value, because you could be disappointed. In the end, you’ll own your home, but whether it goes up by more than the amount of interest you’ll have paid is by no means a sure thing.
People have come to see their homes as their pensions, as their “safety nets” for old age. Increasingly, though, buying a home is less about making money for retirement, and more about leveraging yourself financially to secure somewhere that you want to live now.