Wealth, Debt, Age – and a Decade of Change

According to the Office for National Statistics, the average income rose by 92% during the 10 years following 1995 – but the average house price rose by 204%.

For homeowners, this was unquestionably a profitable period. Many were able to draw on the rising level of equity in their homes, taking out secured loans and remortgages to finance their ambitions and / or manage their debts. For those who didn’t borrow against it, their home effectively acted as a high-interest savings account.

But for millions outside the housing market, the constant house price growth either put their dreams of home ownership on hold or led them to take massive mortgages, risking severe debt problems.

The financial impact of home ownership
So today, home ownership has a much greater impact on an individual’s levels of wealth and debt than it did before the house price boom. To quote the Bank of England’s Quarterly Bulletin: ‘…the evidence suggests that the growth in household debt (about 80% of which is in the form of mortgages) has been associated in large part with higher house prices.’

There’s a world of difference between paying a mortgage and owning a home outright – and age is clearly a factor here.

55-64 year-olds

	1995	2005	Increase
Wealth*	£75,000	£165,000	120%
Debt**	£8,000	£12,000	50%

35-44 year-olds

	1995	2005	Increase
Wealth*	£35,000	£65,000	86%
Debt**	£31,000	£54,000	74%

Source: the Bank of England’s Quarterly Bulletin ‘The role of household debt and balance sheets in the monetary transmission mechanism’.
* Mean household net financial wealth + housing assets. To nearest £5,000
** Mean household debt. To nearest £1,000

Homeowners: 55-64 years old
In general, older people are far more likely to have:

1. owned their home long enough to have benefited from the entire house price boom, and
2. paid off their mortgage.

If their children have left home, they may have even moved to a smaller property, freeing up some / all of the money they’d invested in property.

And they’re more likely to be thinking about financing their retirement, by downsizing, for example, taking in a lodger, selling up and moving into rented accommodation, or looking into a lifetime mortgage or home reversion plan.

Finally, they may have grown used to not making monthly mortgage payments – and be unwilling to start again.

On the whole, it’s easy to see why someone in the 55-64 age range is statistically likely to own more and owe less than someone 20 years younger.

Homeowners: 35-44 years old
Lifestyle changes, such as having children, can easily push people into debt problems – when they move to a larger home, for instance, or finance an extension on their current home.

Younger homeowners are also more likely to have bought their home since 1995.

Even if they bought their first home in 2002, they’ve still suffered from the house price boom. Although they’ve benefited from the rapid increases in the last 6 years, they still paid (and probably borrowed) a lot more for their property than they would have in 1995.

Given the current state of the housing market, someone who bought their first home in 2007 / 2008 may even find themselves owing the bank more than their home is worth. This ‘negative equity’ would mean they couldn’t remortgage if their financial circumstances took a turn for the worse – although they could still consider other forms of debt help, such as debt management or an IVA.

When home ownership isn’t an option
When house price growth outstrips salary growth so drastically, many people give up on the idea of home ownership altogether.

Without the cost of buying and maintaining a home, tenants tend to borrow far less than homeowners. On the other hand, they don’t build up equity either. So tenants tend to reduce both the average ‘Wealth’ figures and the average ‘Debt’ figures in the tables above.

Although the cost of home ownership can discourage people of any age, it’s worth noting that household debt in the 18-34 age range has actually decreased since 1995, quite possibly because so many people below 35 have not entered the housing market at all.