The double-edged sword of rising house price

When it comes to how we fair in this rollercoaster we call life, the most important factors would seem to be the ones in which we have absolutely no control. 

Of course the environment in which we are raised, our propensity for hard work and probably some innate intelligence will all have their part to play.

But the biggest factors behind whether we are likely to enjoy a life of prosperity are where we are born and most importantly of all, when.

It is now a fairly well-established fact that for the first time in modern history, the youngest generations in our society are likely to be less wealthy than the generations that came before.

Indeed, the Millennial generation – those born between 1981 and 1996 – have been dubbed the ‘unluckiest generation’ of them all, having borne the brunt of the global economic catastrophe of the late noughties in terms of employment opportunities and wage growth, only to be hit again by the Covid crisis of recent years.

And things look no better for the Gen Zs coming after them, who will most likely enter the world of work heavily indebted from their education, they will earn less in real terms than their parents and grandparents and their chances of getting onto the housing ladder appear to be diminishing by the day.

It is that final point that really emphasises the generational gap that is widening in our society because home ownership is such an intrinsic part of our desire to provide security for ourselves and our families and also provides a vital mechanism for passing wealth from one generation to the next.

In the UK we often celebrate rising house prices and there is no doubt that there are significant economic benefits considering how closely linked the housing market is to consumer spending.

When people build up significant equity in their homes, they are more likely to borrow more to spend on goods and services and generally have a more optimistic outlook about the future, an important factor for any growing economy.

But the truth is that while rising house prices may have a positive economic impact at the most basic level, unfettered growth in house prices is creating a number of unintended consequences such as inflation, but also some challenges that we have never seen before in our lifetimes. 

According to the latest statistics, the average house price in the UK has now risen to £277,000 – an increase on £27,000 or 10% in the last 12 months. This is a record by some margin and represents some of the highest price to earnings ratios in the developed world.

Even with interest rates so low and a gentle loosening in lending criteria by the banks, the reality is that home ownership remains out of reach for very many Gen Zs and Millennials, creating a long-term structural divide between the property-owning class and those who don’t have property assets to pass on to their children.

In a world of supply and demand it would seem that the obvious solution to drive down prices and enable everybody the opportunity of home ownership and the possibility of passing down wealth to the next generation is to build more houses, but it’s clearly not as simple as that.

In the UK there is a projected increase in households of 250,000 a year, although new housebuilding has remained stuck between 100,000 and 150,000 despite various drives and initiatives to increase that number.

However, it is also argued that the biggest issue is not the number of houses but their distribution with may hundreds of thousands of vacant properties and many millions of people who are house rich with more space than they need while others struggle to a find a house they can afford.

When the housebuilders are making record profits and the government is taking record Inheritance Tax receipts – it took £10m more in April than the year before and predicts it will collect £37bn in IHT receipts over the next five years – then it is easy to see why action to rebalance the housing market may not have been as dynamic as we possibly need.

In a country where our national psyche is rooted in family, stability and social mobility, we need to find solutions that will provide the younger generations with the same opportunities we have enjoyed before it creates something of an existential crisis.

Already we will often see Gen Zs and millennials use the phrase “ok boomer” when dismissing or mocking the attitudes of older generations, but this is more than just another natural expression of difference, it is an accusation loaded in the resentment of finding themselves priced out of a world that older generations have for so long taken for granted. 

The irony of this situation is that millennials and Gen Zs are the most educated and most diverse generation in history, they spend within their means more than Gen X or boomers did at the same age and started saving earlier for their retirement than any generation in modern history.

And yet for no other reason than they were born at the wrong moment in history, we are seeing the creation of a ‘generation rent’ that has less stability, less security and less opportunity to pass on their wealth to the next generation.

Whatever the solution to this conundrum, it is time for us to better understand the unintended consequence that things like rising house prices are having and if life is indeed a roller coaster, to make it an attraction we can all ride.

The Partner Practice is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group's wealth management products and services, more details of which are set out on the group's website The 'St. James's Place Partnership' and the title 'Partner' are marketing terms used to describe St. James's Place representatives.

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