First-time buyers (FTBs) are sometimes referred to as the lifeblood of the mortgage industry on the basis that without them, there is insufficient activity to push existing homeowners up the property ladder. However despite the predictions in the last 18 months of a flat property market because FTBs were being priced out of the market, the market has not only been stable but demand has picked up and house prices continue to rise.
A major contributory factor has been the increase and boom in buy-to-let (BTL) purchases, with property investors taking the place of the FTB as the main driver of increasing property values. A generation of potential FTBs seem to be losing the battle to get on the housing ladder as new and existing property investors are forcing prices up. Therefore, with dwindling interest from FTBs because of affordability, there has been no correction because any slack in demand is being taken up by BTL investors.
However, a closer look at the underlying factors that influence the potential FTB is probably the only way to understand the trend. The broad brush stroke of a market which is simply pricing itself further and further out of reach of FTBs is only part of the story.
Demographics
According to the Council of Mortgage Lenders (CML), home ownership aspirations among under-25s has fallen from 80 per cent to 50 per cent over the last 20 years. While there is still the factor of affordability, the changes in attitude are also being influenced by changing demographics and expectations. There has been a revolution in education in the past 15 years and further education, particularly university, is seeing a massive increase in numbers. This is leading to greater numbers coming later to the workforce and therefore leaving home later. The knock on effect is that society in the UK is beginning to see a social shift towards the various stages in life being put off until much later than has been the case.
Debt
There are two main debt issues to confront. Firstly, there are the passive debts, which are now a direct consequence of further education. Student debt is saddling potential FTBs with a burden which can run into thousands of pounds before they even reach a point of wanting to buy a property. The active debts associated with easily accessible credit as described above have only exacerbated the problems associated with a mindset that debt is an unavoidable consequence of starting adult life in the workplace. Young FTBs have grown up with ‘credit on-tap’. If they’ve ever wanted a student loan, bank loan, a credit card or overdraft, it has always been granted. Frequently, the first refusal for the kind of credit they would like is for the mortgage of their choice.
Renting versus mortgage
The idea that renting is the poor relation in the property market and the perceived stigma that somehow renting is a transitory stage to be gone through on the road to homeownership is no longer clear-cut. Increasingly flexible working patterns, allied to the need to be able to move quickly to further career options has meant that renting is seen as a smarter option by many, as opposed to buying.
When they actually do look at the possibilities of buying, many potential FTBs are surprised as to why they can not afford to buy, given that the rental payments most are making are frequently higher than their proposed mortgage payments. The choice of location and what they can get for their equivalent monthly rental as a mortgage are also usually inferior.
It is hardly surprising that renting is becoming a lifestyle choice because regardless of the potential value in buying a property, which will appreciate in value, it does not outstrip the importance of ‘having it now’. Renting provides the right social cachet by offering bigger bang for the bucks, today. The idea of ‘downsizing’ to buy in exchange for a better return tomorrow and building up an equity stake, is no longer as attractive as it once was.
The mortgage industry, unlike its rental counterpart, does face a harder job dealing with FTBs, who are likely to be in debt at the time of application and for a fair time after purchase. It matters not to a lender how the debt has been achieved, it is going to have an adverse effect on any mortgage application. More so, when the inability to put together meaningful deposits means lenders are being asked to take on prospective clients with debt and with very little by way of deposit. In contrast, affordability is not such a barrier to entry in the rental market.
Also, with the increasing use of credit scoring, particularly on mortgages, young people are at a disadvantage through their lack of experience when dealing with credit facilities, which can have a devastating effect on their credit score, something which all too few are aware of the consequences.
Perception and savings culture
There is a clear belief that the perception in the market as a whole is that anybody can get a mortgage, which is no bad thing. What still isn't getting through to FTBs is the importance of a deposit and this is where their previous credit facilities really hurt; FTBs just aren’t used to saving. While it is perhaps hardly surprising, given the start they have with debt from further education, this shift in culture away from one of saving to one of debt is a contributory factor to the higher risk lending in terms of loan-to-value (LTV), which lenders are being asked to undertake for FTBs. Saving only commences with vigour once they wish to purchase and realise that a deposit is worth its weight in gold. Given the difficulty of saving the necessary funds, people are often kept out of the market for years – while house prices keep rising.
In previous cycles, the gap between wages and property inflation has been regulated by the reluctance of FTBs to venture into the market when prices became unaffordable. Prices would then tend to stagnate or adjust downwards until a new balance had been found. In a property market which is not responding to the lack of FTBs, the stretch on income is becoming impossible, leading to many more not wanting to commit themselves.
Looking at ways of stimulating the market and helping more onto the ladder presumes that we all believe that home ownership is still as aspirational as it was. I think we have already seen that lifestyle choices and economic conditioning have soured the home-owning dream for many, even though the aspiration to own is still as ever. So what can be done to assist FTBs?
External support
More FTBs than ever are getting onto the property ladder through inheritance windfalls or through receiving ‘early inheritance’ gifts from parents or grandparents who have serious amounts of equity locked in their properties. Harsh inheritance tax levels encourage funds to be gifted before death and the attitudes of families towards passing money on seems to be changing.
Changes to the Stamp Duty rules to favour FTBs would be a clear way in which government could provide practical assistance to FTBs. Another would be to extend the current initiative and expand the shared equity scheme which is aimed at key workers and include FTBs. The use of guarantors needs to be looked at anew. Government could be at its most useful by engaging the lending community in hammering out a more equitable and helpful agreement on family guarantors. This could then give confidence to both lender and guarantor.
Products
From a product point of view, there are a number of initiatives from a variety of lenders to tempt FTBs. But the use of affordability calculators, self-certification and 100 per cent plus LTV lending can only go so far. Any further relaxation in criteria could lay lenders open to a charge of bad lending, particularly if the economy has a dip and intermediaries face charges of mis-selling. Retrospective rulings have tended to be a feature of regulation in the past.
In summary, we need to be aware that the FTB is still an important component in the property market, but that aspiration to property ownership is not automatic. More could be done to inform the public, especially FTBs, about the whole home buying process including the pitfalls, dangers, costs and options. Brokers do a fine job but more should be done in school. It would fit well with a general credit education scheme. Lastly, whatever is done to stimulate demand, by making it easier for FTBs to jump aboard, the whole market is driven by supply and demand. Artificial attempts to tinker with a free market tend to end in tears. Education, finding ways to reduce the debt burden on the next generation and more property being built to equalise demand and stabilise house price inflation will do more to stimulate the demand for FTBs to come back to the market.
