The odds are against children of the baby boomer generation ever stepping on to the housing ladder, but an idea suggested five years ago of intergenerational mortgages whereby mortgage debt and property are passed on to offspring might just work
Pity the plight of first-time buyers and I don’t mean the 50-something divorcee who’s sold up, rented and then bought into the housing market again with the new love in their life. That’s the sort of buyer who moves into the modest home that a couple in their 20s might aspire to own.
No, I mean real first-time buyers against whom the financials and the demographics are heavily loaded. They have to endure a deferred adulthood staying on at school until 18 and then perhaps spending another three to five years at university. Then there’s the issue of student debt, poor job prospects and, if they get a job, high rents and low interest rates, all of which make saving for a 25% deposit on a house an uphill battle.
No wonder so many stay with their parents. And then there are the demographics. These are highlighted by David Willetts, minister of state for universities and science, in his book The Pinch, which I started reading over the summer.
According to him, born as I was in 1947, I’m part of the problem. I’m a baby boomer and the baby boom a spectacular growth in the birth rate lasted from 1947 to 1965. Apparently, and counter-intuitively, the resulting expansion of the workforce in the 1960s didn’t lead to unemployment and a depression but to something of an economic boom, though there were a number of subsequent busts.
Baby boomers are the beneficiaries of periods of rampant inflation, which eroded mortgage debt and drove up house prices. What’s worse is that although we flowered in the liberated 1960s and now sip slightly more wine than is good for us, we’re not dying. In fact we’re living far too long.
This is creating a burden for the smaller workforce that has followed my generation into employment. There’s already been a huge impact on private sector pension schemes and taxes will rise along with the cost of caring for the elderly.
Willetts explores the relationship and responsibilities of the different generations and calls on my generation to act responsibly towards those who will succeed us.
One day we’ll be dependent on them too, he writes. Part of his argument is based on the accumulated housing wealth of the baby boomers. Citing 2009 data, he says half the wealth in owner-occupied housing, some £1,030bn, belongs to the baby boomers and only about £330bn, or 15%, to everyone under 44. Given the relative size of the baby boomer cohort and the fact that people tend to move up the housing ladder as they become more prosperous, one would expect some disparity in wealth between the different generations.
That said, is he on the right track anyway? An inconvenient truth is that 50% of people living in poverty in the UK are home owners. That doesn’t help his case but he doesn’t suggest a mechanism for change or correction. Taxation hinders transfer of wealth from one generation to another. The idea that family wealth should be passed on from one generation to the next would widen the gap between the haves and have nots.
Perhaps a solution might come from the industry itself. Surely a flexible form of tenure could be devised that is appropriate for when we are sans money, awash with money and then when we’re sans everything.
Coincidently, almost five years to the day that I’m penning this piece, Mike Lazenby, then chief executive of Kent Reliance Building Society, suggested in a radio programme that an intergenerational mortgage might be the solution to the affordability problem for first-time buyers, which set off a media frenzy starting with a front-page story in the Daily Mail.
All the coverage had a similar theme. The Kent Reliance product was a death-bed mortgage and the mortgage gift the kids wouldn’t thank you for. It was monstered by the media, which is odd given that intergenerational mortgages were already a reality in Switzerland and Japan and that in practice the mutual’s offering was simply an open-ended interest-only mortgage that could be reviewed every five years, ad infinitum.
When the buyer died mortgage debt and interest payments, along with the property, could be passed on to children. Since the mortgage debt could be used to offset the value of the estate and limit exposure to Inheritance Tax, it would also help the transfer of accumulated wealth across the generations.
Given the rate of population growth, the low levels of housing construction, the high number of baby boomers jumping on to the buy-to-let bandwagon, and high unemployment among the under-25s, empty nesters may become a thing of the past and parents and children will be growing old together under the same roof. Lazenby’s legacy could be a perfect fit.