Mortgages Direct’s index shows that first-time buyer (FTB) loans dropped substantially in the Spring, with only 23 per cent of all mortgages being taken out for FTBs compared with 47 per cent the previous month. However, the number of buy-to-let (BTL) mortgages surged from 9 to 19 per cent, as investors took advantage of the continued demand for rented property and the growth potential of their investment. These statistics have been taken by some as an indication that BTL investors are pricing FTBs out of the housing market.
Affordability
Although affordability is undoubtedly affecting the number of FTBs currently in the housing market, it is not the only influence on the group’s market share. Similarly, the number of BTL properties is not necessarily restricting FTBs’ access to the housing market, but, to an extent, is a response to changing lifestyle patterns among potential FTBs as well as other groups.
With the current trend of house price inflation, some potential FTBs, particularly those who have recently left education and started work, are undoubtedly struggling to raise a deposit and meet mortgage repayments, often opting for interest only mortgages, despite not having the means to repay the mortgages at the end of the term.
The affordability issue has not been helped by the Stamp Duty threshold which, despite having been raised to £125,000, is still too low to make a difference to most FTBs. The Stamp Duty tax also comes on top of fees for searches, surveys and solicitors. However, the introduction of Home Information Packs (HIPs) in June 2007 is set to reduce some of the financial burden of purchasing a property for FTBs, as sellers are responsible for providing the HIP, which will include a Home Condition Report (HCR) and local searches.
Helping hand
A recent trend has seen increased numbers of FTBs being helped out by their parents, who are putting forward lump sums towards a deposit as an advance on their child’s inheritance and helping them to move out. There are also cases of joint mortgages where the parents’ income is taken into consideration and they act as a guarantor to ensure that repayments will be met.
FTBs have also been helped by the recent relaxed lending criteria. Traditionally, banks would lend up to 3.5 times single income or 2.75 joint income. However, as a result of house price inflation exceeding wage growth, lenders have relaxed their criteria in recent years. In some cases it is now possible to borrow as much as six times your salary.
The real cause for this lower level of FTBs in the market therefore appears to be a result of a conscious lifestyle choice. Buyers are choosing to wait for longer before buying their first property, because of the expenses involved and also because they prefer the flexibility that renting offers. It allows them to take the time to get to know an area before moving there permanently and it allows them to live where they would like rather than having to consider the cheaper, more affordable areas.
BTL investors then, are not so much filling the gap left by falling numbers of FTBs but are taking advantage of increased demand from FTBs as well as families, students and immigrants for rented accommodation, which these groups see as a more practical option. In addition, BTL has become an increasingly lucrative investment option in the UK in recent years, as demand and therefore rental yield has continued to grow.
The increase in the number of school leavers joining the student ranks has had a particularly large impact on the BTL market, as student accommodation is a huge area for BTL and many cities throughout the country have very high student populations. The strong growth in immigrant tenants, particularly from Eastern Europe, has also contributed to a buoyant BTL market.
So, although BTL may continue to increase in the immediate future, it is dependent on the demand of many potential FTBs, for whom renting remains an attractive option. However the industry is being creative in responding to the market conditions and there are many competitive deals available to encourage FTBs to make the step onto the property ladder. With house prices stabilising, confidence has returned and activity levels for both BTL and FTBs has increased from the low levels of last year.
