Flying the nest is one of the great rites of passage that everyone goes through sooner or later. Over the years, however, the once common convention of getting on the first rung of the property ladder with a starter home and a 90 percent mortgage has become increasingly challenging.
UK property prices have steadily risen at a faster rate than salaries over recent decades such that the average house price is now almost eight times the average salary. Even the average first time buy is 6.5 times the average salary. This is the greatest disparity that has been seen between earnings and property prices in almost 150 years.
With this backdrop, it is no surprise that more people than ever are taking the decision to rent instead of buy when they initially move out of the parental home. In fact, most 20-somethings can expect to spend around 10 years renting before buying their first house in their mid-30s.
There are pros and cons to renting. On the plus side, there is only a security deposit to be found up-front, which usually equates to five or six weeks rent, or about £1,500. The average down payment that a first time buyer needs to find is closer to £60,000.
Renting also provides more flexibility and less hassle. Any serious maintenance issues are taken care of, and sometimes minor ones too. And if the tenant decides to relocate or travel the world, or even move back in with parents, all that’s needed is to give a month’s notice and leave the place looking tidy.
On the flip side, there is the perception that paying rent equates to “throwing away money” in as much as the money spent does not buy or contribute towards a tangible asset. This is, in some ways, a philosophical argument and we will look in a moment at how attitudes have changed over time.
This suggests it is not just affordability that could drive changing practices, but also changing attitudes and priorities. It is also worth noting that practices and conventions can vary between different countries. For example, in Italy and Spain, multiple generations living under one roof is commonplace, and young people tend not to move away from the family home until marriage. Practices in France and the UK are quite different.
One of the most noticeable insights the below data provides is that young Italians spend less time renting than any other nationality on average. This is partially due to cultural factors. Families have a tendency to remain close-knit regardless of age, something that is also a factor in Spain, which shows the oldest average age for both moving out and making that first time purchase.
| Country | Average age buy | Average age move out | Average years renting | Average monthly rent* | Total spent on rent before buying |
|---|---|---|---|---|---|
| USA | 33 | 24 | 9 | $1,700 | $183,600 |
| Australia | 36 | 23.4 | 12.6 | $1,500 | $226,800 |
| Germany | 34 | 22.5 | 11.5 | $915 | $126,270 |
| Canada | 36 | 25.5 | 10.5 | $1,200 | $151,200 |
| UK | 34 | 24.6 | 9.4 | $1,115 | $125,772 |
| France | 31 | 22.4 | 8.6 | $780 | $80,496 |
| New Zealand | 35 | 27 | 8 | $1,130 | $108,480 |
| Italy | 33 | 26.1 | 6.9 | $706 | $58,456 |
| Spain | 41 | 28.2 | 12.8 | $795 | $122,112 |
Central and northern European countries are quite different. In Germany, for example, it is considered normal to move out as soon as you finish education and get a job. Average monthly rental rates are more manageable, and so young Germans are more likely to kick back and enjoy their 20s without the responsibility of home ownership and a 20-30 year mortgage on their shoulders.
The US is an unusual case as there are more instances of young people renting for a year or two then moving back in with parents. Sometimes this is for financial reasons, but also, we should factor in that at 29, the average marriage age is significantly younger than most European countries (for example 32 in the UK, 33 in Germany) and the divorce rate is higher - US has the 20th highest in the world compared with 48th and 60th for Germany and the UK respectively. We can conclude that there are more young Americans returning to the parental home after a failed first marriage than other countries.
This could go some way to explaining the apparent paradox that while the USA has the highest average monthly rent, Americans do not, on average, spend as much in total on renting as other nationalities. There might also be additional factors contributing to their ability to buy a home sooner, such as higher average incomes, access to credit and cultural factors that prioritize homeownership.
It is beyond question that getting onto that first rung on the property ladder has become more difficult over time.
In 1996, the average house price in the UK was £54,000 and the average annual salary was £28,000. First time buyers could purchase a one-bedroom apartment for around £30,000, and the idea of saving up £5,000 or so for a down payment and then taking out a £25,000 mortgage was within the reach even of those earning £12-13,000 per year.
Today, the average house price is £294,000 and a one-bedroom apartment that would have sold for £30,00 in 1996 is now worth almost £200,000, an increase of more than 600 percent. Yet the average annual salary has only risen by 35 percent over this time.
Clearly, making that first time purchase is more of a financial challenge, and a far bigger commitment than it was 25 years ago. But there are other changes afoot, too. Baby boomers, and to a lesser degree, Generation-X, tend to measure success by acquisition - owning a big house, a nice car and so on is important to them, a hangover from the years of postwar austerity that they or their parents lived through.
Millennials and Generation-Z are less concerned with acquisition than with experiences. “Owning stuff” is not as important to the smartphone generation, who are more likely to have grown up surrounded by all that they need.
That they would prefer to spend their money on experiences than acquisitions throws quite a different light over the rent/buy dilemma. The notion that money paid on rent is “wasted” because it is not contributing to the acquisition of property is, perhaps, an outdated fallacy. Millennial attitudes place more value on the experience of living in the property without worry or burden than in spending 30 years paying off a mortgage so they can say the house is “all theirs”. Perhaps they have a point.
The oldest of the millennial cohort have only just turned 40, so we are very much in a “watch and wait” posture to see how renting and buying patterns might continue to evolve in terms of attitudes and aspirations. However, what we can say is that as couples settle down and have families there is still a general tendency to put down roots and get onto the property ladder.
The UK government has been far from blind to the difficulties that first time buyers face. Its Help to Buy scheme gave first time buyers the chance to buy a house with a five percent down payment. The scheme then provided 20 percent as an interest-free loan. So if, for example you wanted to buy a house for £286,000, the average when the scheme launched, it worked as follows:
The government loan was interest-free for five years, and then charged at an interest rate of 1.75 percent, subject to annual increases.
We use the past tense because Help to Buy came to an end in March 2023. There are, however, alternative initiatives out there.
Setting aside the philosophical arguments for a moment, from a purely financial perspective the benefits of getting onto that first rung of the property ladder are hard to argue with, as the worked example below demonstrates:
| Figures as at April 2023 | |
|---|---|
| Average first time buyer property price | £245,522 |
| Best rate for a 95% mortgage | 4.4% |
| Mortgage balance after nine years | £176,639.81 |
| Equity after nine years | £69,282.19 |
Of course, what this fails to take into account is that property price have risen by about 64 percent over the past nine years. If the same happens over the next nine years, the property would then be worth £402,517, giving them total equity of £225,877.82.
All this suggests that there is still plenty of truth in the old adage that there’s no better investment than bricks and mortar. Having said that, buying a house is about more than investing money. The changing attitudes we have seen as millennials have entered their 30s showed us one thing. Now, Gen-Z are starting to enter their late 20s. Will their aspirations continue to rate experiences over acquisition? If so, we could see a trend away from home ownership entirely.