Across Europe, Inequality Hangs Over Housing Issues

British lenders are restricting access to mortgages, demanding larger deposits, and refusing to lend to some furloughed buyers

European Views | Recent numbers from the UK underscore just how much first-time British homebuyers rely on financial help from parents and families, with the ongoing coronavirus crisis making the gap between haves and have-nots even more extreme when it comes to financing for buying property. Research carried out by Legal & General reveals 23% of post-COVID housing transactions in 2020 will be supported by the Bank of Mum and Dad, up from 19% last year. This comes as little surprise, given that British lenders are restricting access to mortgages, demanding larger deposits, and refusing to lend to some furloughed buyers.

The problem is hardly one confined to the UK. Across Europe, real estate markets which were already daunting for lower-income buyers – like Germany or Portugal – are set to become even more gruelling because of new economic stresses caused by the pandemic. 40% of young people in Europe who are at risk of poverty consider prohibitive housing costs one of the chief contributors to their plight, while a similar percentage of low-income earners already struggle with overcrowded living situations.

In the short term, governments can offer initiatives and grants to alleviate the strain on younger and more disadvantaged buyers, allowing them to take their first step onto the property ladder. In the long term, however, Europe may require a more wholesale reassessment of urban development models that prevent people from leaving overpriced and overcrowded metropolitan centres and flourishing in more affordable communities.

Market boom a momentary mirage?

As the UK economy cautiously emerged from a crippling lockdown period, Chancellor Rishi Sunak attempted to boost the market by announcing a holiday on stamp duty until March 2021. That measure appears to have paid some dividends, with 66,300 English mortgage approvals in July representing a 66% increase from the month previous and a sevenfold jump from the COVID nadir of 9,300 in May. Household deposit levels have also began to normalise, while consumer credit demand has stabilised.

However, those positive signs mask deeply seated issues with the housing market itself. The ongoing economic impact of coronavirus has made banks more wary of lending altogether. Whereas pre-COVID, there were 137 different two-year fixed-rate mortgage deals available for borrowers with a 5% deposit on their property, there are now just two. Buyers able to front a 10% deposit have more options, but the associated fees continue to rise and banks like HSBC have stopped offering these mortgages altogether.

As a result, new buyers looking must rely on familial support more than ever before. According to Legal & General’s analysis, 65% of recent buyers said their purchase would likely not have taken place without aid from relatives, while 14% intimated that without economic support from parents or extended family, they would never be able to afford their own place. All of this puts the lie to rosy new numbers about a booming property market and soaring mortgages, which have been effectively subsidised by government stimulus and furlough schemes which are soon set to expire.

A pan-European problem

Across Europe, young people face similar difficulties. In Germany, home ownership has remained fairly constant at around 45% over the last decade, but the demographics of those homeowners have shifted. In 2010, 17% of transactions involved 17- to 25-year-olds; by 2017, that percentage had fallen to just 12%, while 33- to 44-year-olds saw a similar drop-off. The number of first-time buyer deals per annum fell from 700,000 between 1998-2002 to 400,000 in 2016 and 2017.

Germany may be one of the most difficult real estate markets to break into (only Switzerland has a lower home ownership rate in Europe), but it’s not alone. A 2018 report from Cáritas Europa concluded the majority of Portuguese young people cannot afford to buy a home. EU data shows that, across Southern Europe, young people generally do not leave their family homes until very late in their 20s, with people in Malta, Croatia, Slovakia, and Italy generally continuing to live with their parents into their 30s.

COVID-19 has only increased the barriers to moving out. The pandemic has disproportionately affected low-income workers, given that only 9.2% of them can work remotely. Add the fact lower-income people are less likely to have accrued savings –an all-important buffer in times of crisis – and it becomes clear the inequality chasm is set to widen in the wake of the pandemic.

A fairer future

Both economic inequality and housing shortfalls seems to be linked to prevalent models of urbanisation. In Europe, 48 cities are home to just 20% of the continent’s population, but have been responsible for 43% of GDP growth and 35% of job growth over the last 20 years. The necessity for social distancing measures however, has led to an uptick in remote work, with over half of German companies keen to continue the practice indefinitely. UK Health Secretary Matt Hancock recently indicated the British government could make it mandatory for employers to offer all staff members to opportunity to work from home.

This could counteract the need for young professionals to congregate in mega-cities like London and Paris, fuelling astronomic housing prices they can ill-afford. Instead, young people may be able to justify living further away from major cities, taking advantage of more affordable housing while also buttressing declining rural economies. Norway has trialed methods of jumpstarting this shift by spreading parts of the public administration across the country, thus preventing high-paying jobs from being concentrated in one city. The enterprising town of Cinquefrondi in Calabria is even marketing itself as a virus-free haven, enticing prospective homeowners from other parts of Italy with the promise of €1 properties.

That kind of blueprint, coupled with a sharp rise in teleworking going forward, could spell a sea change for existing models of urban development. Whether or not the recent trend towards de-urbanisation continues, European governments need to have a plan to ensure a whole generation of potential homeowners is not forced off the property ladder indefinitely.