The property market is a lot like a motorway.
For first-timers it looks scary, but once you are on it, you wonder why you were ever worried at all. You can go at your own speed. Take a risk and go quickly and you could race away. But, you need to keep your wits about you, because you could quickly come unstuck.
Or you could choose to take it steady, safe in the knowledge you will end up where you want in reasonable time. However, this motorway has a problem at the moment. It’s jammed. Like a stream of cars stopping to watch an accident, the market has rubber-necked. And it’s second-time movers that are causing the traffic. They have hit the brakes and are having a good look around.
Ahead, those that have got through the blockage are tearing away, but behind the congestion is getting worse. And it’s going to stay that way for some time.
What’s the problem
So what’s second-time buyers’ problem? Well, they’ve had a nasty wake-up call. For the last few years they've been patting themselves on the back, celebrating their good fortune at getting their first home and reaping the benefits of house price growth.
They thought first-time buyers were the ones with the problems. They were the ones who discovered house prices were shooting up quicker than they could save for a deposit. They were the ones having to borrow five, six, seven times their income to buy a one-bed flat above a fish and chip shop.
Second-time buyers were able to look down the ladder with a smug grin on their faces. Then they started to look around for their next move and the grim truth hit them – everyone else’s home has also increased in value. Suddenly they are not as well off as they thought. Then the fact dawned on them – the next move was going to be just as difficult as the first.
People talk like never-ending house price growth is a good thing, and that housing crashes are bad. The thing is, as many a man has been heard to say to his bride on their wedding night, it’s all
about proportion.
Most people move to another house in their own area. So price changes are likely to be similar. A 10 per cent rise in price on a £100,000 home is far less than a 10 per cent rise on a £300,000 home. That’s a lot more extra money that you need to find. But at the same time a 10 per cent fall brings that £300,000 home more in to reach.
Doing the sums
Let’s assume our average second-time buyer bought three years ago. They would have paid around £112,889 for their first home. These homes would have increased in value to £145,801. But so have the houses that they want to move in to. The average value of a second-time mover’s property is now £199,390. After three years, most first-time buyers would still owe £100,265 on their mortgage, meaning they would have to scrape together an extra £70,000 to afford their new home.
Worse, that’s an extra £300 a month in mortgage repayments at a time when many young couples will be thinking of starting a family. Inevitably the situation is more dire in London and the South East. There, second-time buyers would have to add an extra £100,000 to their loan.
Once they’ve sat down and done the sums, the prospect of moving house is not nearly so appealing. Especially as wages are unlikely to have increased at the same rate.
Neither have income multiples. Despite tales of lenders offering up to seven times income, the average is still little over four. That means, to buy the average second-time mover’s home in London, you would need a household income of at least £80,000.
But at least they will have some equity. Even those who opted for interest only at the start should have a small pot of cash. Yet these buyers will not want to stay on interest only for much longer. The jump in repayments is going to be significant. Now interest rates are on the up too, and its not just the mortgage. It’s the fees. According to a survey by Abbey last year, around one in 10 dread the prospect of paying Stamp Duty and legal fees. Gordon Brown take note – Stamp Duty is forcing a whole generation to reconsider moving home.
According to Mortgageforce research, some 42 per cent say they would rather extend than move. But this is not a viable option for everyone. The crux for most second-time buyers is that their move is through necessity. There are those living in one-bedroom flats that are expecting their first child. Or those that need to move because of a different job.
Abbey also found that one-in-10 were desperate to reduce their commute. A whopping one-in-three hated where they live. This must be a symptom of the current market condition. It demonstrates how many buyers forced themselves in to any property they could afford that they actually ended up in an area they did not like, a house that was no good to them, and in a place where they could not easily get to work.
Now they want to move and they can’t. If increasing numbers of second-time buyers stay put, this spells further gloom for those saving to buy their first home. Fewer first-time buyer properties means more demand and higher prices. And so the spiral will
continue.
Smaller steps
One solution is for buyers to take smaller steps on the ladder in a shorter period of time. This way the realisation that they will have to stretch themselves again is lessened because the increase in borrowing is smaller. It seems like a sensible proposition. After all, traditionally couples bought in their early 20s and then moved home in their 30s when they settled down with kids. This gives plenty of time to build up equity to be able to afford that bigger home with a garden, near good schools.
Today, rising prices and increased focus on building a career means that most first-time buyers have passed 30. Families come soon after that so a new home is needed that much quicker.
But, again, there are additional costs with moving. Besides, who really wants to move every three years? It barely gives you time to put your personal touch on a home – and isn’t that the key difference between owning and renting?
So perhaps overpaying as much of your mortgage without penalty as regularly as possible could ease the rubber-neck. This way, second-time buyers will narrow the equity gap between their current and future homes. It helps them move into bigger and better properties whenever they need to, and releases the strain on the foot of the market. It’s by far from a perfect solution.
Most first-time buyers stretch themselves to the limit to buy their property so its unlikely they will have much spare cash to overpay but it would be worth it in the long-run.
For second-time buyers who are really concerned that they are about to take on greater debt just as the market peaks and could start to tumble then there is one answer – get off the motorway. Sell up and rent. They could pocket the cash and find a place where the rent repayments will be roughly what they would have paid in mortgage interest. If necessary they can save what they would have paid on capital repayments until the market is calm. That way they get to keep building that equity pot and feel like they haven’t taken a step back.
Back to square one
However, that puts you back to square one and facing the same dilemmas that they had when they were renting. Is now the right time to buy? Should I save for a while longer? What happens if rates move? What happens if prices fall? But these are the eternal imponderable questions that any buyer has to face. You can guess what is the best thing to do. But the real answers will only become apparent in hindsight.
This is why buying is always a gamble and explains why so many rejoice when they get a good deal, and find a home that they
truly love.
