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A leg up for Britain's generation rent

Will David Cameron’s new mortgage plan get British renters on the property ladder?

A leg up for Generation Rent

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There was a time, not long ago, when middle-class Britons could expect that, with the help of an education and a decent job, they would one day own their own home. Kathleen Taylor, a 37-year-old civil servant, bought her first London property back in 1997, a two-bedroom apartment that cost her just $180,000. Even then, as with many young, first-time buyers, her mother had to underwrite the mortgage and provide part of the down payment (a loan she later paid back). Since then, Taylor has moved house several times, enjoying the security of being on what the British call “the property ladder”—a metaphorical climbing structure long regarded as the path to financial security.

Turns out she was one of the lucky ones. Today, even with low interest rates and moribund house prices, many Britons Taylor’s age and younger have begun to give up hope of ever “getting on the ladder.” An example of how quickly things have changed: Taylor’s 33-year-old younger brother, a freelance sound designer, has, she says, “been completely priced out of the London market,” despite having cobbled together a decent deposit from savings and a recent inheritance. “And that’s assuming he could even get the mortgage.”

On the last point, Britain’s Tory-led government has introduced a program they hope will change things for Britain’s burgeoning “generation rent.” On Nov. 21, Prime Minister David Cameron unveiled a government-backed mortgage scheme that will allow first-time buyers to purchase homes with only five per cent down. (At present, banks insist on minimum deposits of 20 per cent from first-time buyers, which is no small demand. Though house prices have sunk back to 2006 levels, they are still overvalued by at least 25 per cent, according to The Economist.)

In a speech to the Confederation of British Industry, Cameron presented the plan as one that would help kick-start the torpid economy, rather than risk creating another borrowing bubble. “When first-time buyers on a good salary cannot get a reasonable mortgage, the whole market grinds to a halt,” he told the assembled audience. “And that ricochets around the economy, affecting builders, retailers, plumbers—all the people that depend on a housing market that is moving. If we don’t do something like this, we are not going to get this vital market moving. We will restart the housing market and get Britain building again.”

The scheme is part of a larger plan to solve Britain’s ongoing housing crisis. At present, new housing starts are at their lowest levels since the 1920s. This, combined with the high rents, inflated real estate prices and skittish mortgage lenders, has led to difficult times for those looking to get in the market at the ground floor. Now, the government’s fix also includes a $660-million fund to help kick-start previously stalled building projects, open green belts to development, and provide further incentives for tenants in subsidized housing to purchase their homes. In a written introduction to the project, the Prime Minister described the current housing crisis as one in which “lenders won’t lend and builders won’t build and buyers won’t buy.” This scheme intends to reverse the crisis on all three counts.

But Cameron is being harshly criticized on both sides. Labour Leader Ed Miliband called the new scheme “too little too late—from the man who was responsible for choking off growth in the British economy when he came to power.” He went on to point out that the new building fund puts back just 10 per cent of the $6.6 billion Cameron cut from housing investment last year.

Some fiscal conservatives have lashed out at the program as well, albeit for different reasons altogether. On his blog, Ian Cowie, personal finance columnist for the Daily Telegraph, savaged the plan, saying, “the government now proposes to encourage laxer lending to people with no history of repaying debt so that they can buy overpriced property. You really could not make it up.”

Even some prospective first-time buyers in a position to benefit from the new scheme are suspicious of the idea. “Ninety-five per cent mortgages—isn’t that how we all got into this problem in the first place?” asked Elizabeth Claffey, a 29-year-old London finance worker who has spent the past seven years renting shared accommodation because she cannot afford the steep deposit required to buy. In the same breath, though, she conceded the situation as it stands is untenable. “I don’t know anyone my age who has bought without the help of their parents, and that’s simply because the gap between what my generation earns and how much real estate costs has widened enormously.”

As for Kathleen Taylor, she supports the new mortgage indemnity scheme because it stands to help first-time buyers like her younger brother. “When prices are falling, interest rates are low and people still can’t get on the ladder, that’s the credit crunch,” she says. “If the government can ease that a bit, they’re attacking the root of the problem. And as a taxpayer and a property owner, I don’t mind taking on some of that risk.”