Friday 28 August 2009

‘After the Great Recession’

The UK economy had been going backwards - shrinking - for over a year.

The deepest recession since World War Two was just about over, although its effects were still being felt.

“We really had a true global financial crisis,” explains economist Jonathan Cribb to our couple Tacita and Charlie - who were aged 14 and 16 at the time.

“We hit the credit crunch in slow motion. In the UK, the bank Northern Rock got into trouble in late 2007, and then all hell broke loose in the autumn of 2008 with Lehman Brothers going bust.”

Companies laid off staff, froze pay or shortened working hours to try to survive. The flow of money around the economy slowed - access to credit was restricted. And that fed through into the housing market.

House prices, which had risen steadily since the mid-1990s, had been falling in the recession. But this time, unlike in 1997, there was no sweet spot.

“For prospective house-buyers like yourselves, 2009 was a funny place,” says Jonathan.

In August 2009, the average house price in the south-east of England was just above £206,000.

“House prices in real terms had grown by 120% since our last year - 1997. But incomes were up by only 25%. That made it a lot harder to buy a house,” he says.

The Great Recession - as it is now known - also had a greater impact on young people than older generations. Twenty-somethings suffered the biggest falls in earnings and higher unemployment rates. Companies tightened their belts and stopped hiring.

The late 1990s and first half of the 2000s had seen house prices soar, particularly in the most crowded part of the UK - London and the South East. Demand was outstripping supply. Buy-to-let and overseas investors continued to look for property alongside traditional house-hunters.

“And we start to see television shows like Homes Under the Hammer - about selling your house to make a profit,” says historian Claire Langhamer.

Fewer homes were also being built. Housebuilding figures fluctuated around the 200,000-a-year mark at the start of the noughties - less than half the total in 1968. By 2009, the number of completed dwellings in the UK had dropped to 157,000.

And during the 2009 credit crunch, for those young buyers living in expensive parts of the country, getting a mortgage would also have been tricky.

“There was a massive contraction of mortgage lending,” says personal finance expert Sharon Collard. “Loan to value of 75% became fairly standard. You’d need a 25% deposit - a big chunk of money. Lenders’ appetites for risk had completely collapsed - and the regulators forced them to become more responsible for their lending.”

The tough conditions are borne out in figures on home ownership from the Resolution Foundation think tank. In the south-east of England between 1988 and 2009, home ownership among 25 to 34-year-olds fell from 58% to 36%. By 2018 it had dropped further – to under 30%.

But for those young people able to get on the 2009 housing ladder, there was one “saving grace” says Jonathan Cribb. Record low interest rates.

“This was the point where the gap between renters and owner-occupiers opened up. Rents had increased over the decade, and when the Bank of England cut interest rates to keep the economy afloat, that brought mortgage rates down.

“Those who did get a home benefitted from very cheap credit.”

Charlie and Tacita wonder about their August 2009 earnings.

Looking at his spreadsheet, Jonathan says a young couple like them - earning slightly above average wages - would have earned about £37,000. In today’s money, that’s almost £46,000 - and more than they currently earn.

“It means over the past 10 years young people's earnings have actually fallen back a bit - one of the reasons why it’s so hard to buy in 2019,” says Jonathan.

The sums for August 2009:

· Tacita and Charlie have a 2019 gross income of £43,500, which is slightly above average for couples in their mid-20s

· In 2009, a couple in a similar position would have an estimated gross income of £37,000 - that’s nearly £46,000 in today’s money

· After saving for an estimated 25% deposit, they could borrow about £116,000 at an interest rate of 3.9%

· In 2009, they could buy a property costing about £155,000 - that’s roughly £192,000 in today’s money

Sources/calculations: Institute for Fiscal Studies, Savills UK, Building Societies Association, Bank of England

Even if they could have raised a deposit of more than £38,000 - and bought for £155,000 - there are slim pickings in the Evening Argus property pages.

Only about half a dozen properties in Brighton would have been affordable.

“The 2009 deposit would definitely have been a problem. The deposit is partly why we have a problem right now,” says Charlie. “People ask me why I haven’t moved out of my mother’s home. I could rent a house in 2019, but I wouldn’t be able to save. Renting and saving at the same time is totally unrealistic.”

The present day situation for first-time buyers is an intractable problem, says personal finance expert Sharon Collard.

“Some people are doing extremely well out of housing wealth, while others just can’t get on the ladder. And that seems very unfair. There are now at least eight government housing schemes aimed predominantly at helping first-time buyers. That's great, but it just kind of sums it all up doesn’t it?”

And how do Charlie and Tacita feel after their journey back in time?

“We came all the way from buying semi-detached houses to barely being able to afford a flat on a leasehold,” says Charlie.

“It seems to me that to buy in 2019, you’re either in the North - like one of my friends who has managed it - or you’re down here and you’ve been given some help from parents.”

Tacita say she is not depressed by what she learned.

“Older generations say it was just as hard back then,” she says. “But I come away from this time trip feeling almost relieved that our hunch was accurate - that we are probably the generation for whom house-buying is the hardest.”

The couple doubt they will ever be able to get on the property ladder in the south of England.

So what will they do?

“We have to look at an alternative route,” says Charlie. “We can’t afford to buy a conventional house.”

They are seriously thinking of building a so-called “tiny home” - explains Charlie - a small self-contained eco cabin, possibly on a trailer.

“Whatever we do will be a long slog,” adds Tacita. “But we hope to get benefits back in the longer term, with lower bills and no mortgage.”