A casual observer might be forgiven for thinking that house price falls in recent months have begun to make property slightly more affordable for young would-be buyers. Indeed, loan-to-value (LTV) ratios have been edging down. In August, the typical first-time buyer took out a loan at 84% of the property value, compared to 90% at the end of 2007.
However, this is primarily the result of lenders scaling back lending criteria, rather than borrowers finding their deposit money stretching further. This meant that between April and June this year a typical first-time buyer put down a deposit of £19,000, compared to £14,500 a year previously.
Income multiples for first-time buyers have also begun to edge downwards, but remain elevated. In the second quarter of this year, first-time buyers accounted for 38% of all house purchase transactions – higher than at any point since the start of 2006 (although the total number of house purchase transactions is currently at an all-time low). So where are first-time buyers coming from?
What is a first-time buyer?
Our data on first-time home purchases captures buyers from a number of quite distinct groups. Historically, around a fifth of reported first-time buyers have, in fact, owned a property at some stage before in their lives, but are currently not living in a home they own. They may have sold it in the past and are currently renting or living with friends or family. They are therefore reported as buying property without selling at the same time, and so are captured in our first-time buyer data.
Other “first-time buyers” may be the product of dissolving households – divorcees, for example, who are using the proceeds of the sale of a family house to buy two separate properties.
These “returners” to owner-occupation are typically older – data shows that the majority are aged over 40. As in previous years, however – and even at the height of the housing cycle – the majority of first-time buyers are under 30 and have genuinely never owned a property before. How young people can afford to get on the housing ladder has been a recurring question in recent years.
Deposits for first-time buyers
100% mortgages – with the borrower paying no deposit and taking out a mortgage for the entire value of the property – were more widely available in different market conditions, when property prices were rising and mortgage credit was more widely available. But even at their peak early last year these loans represented only a small proportion of overall first-time buyer purchases – around 5%.
In the current market environment, however, 100% mortgages are not so widely available. Many lenders typically require a higher deposit from borrowers than before. So even though the total needed to buy a house is declining, first-time buyers are facing a new affordability challenge in the shape of a higher deposit required by lenders.
The overall effect is that the would-be buyer without a substantial deposit finds that lower house prices do not mean that he is better placed to get a mortgage than they were when house prices were rising. The opposite, in fact, is true.
Typical first-time buyer deposits rose from under £15,000 in the second quarter of 2007 to £19,000 12 months later – quite an amount for a young saver to have accumulated over a relatively short working life. And quite a shock for the would-be buyer who has been saving for a deposit since 2007 and now discovers he needs to find an extra £4,000.
Help for first-time buyers
Last year, our data showed that in 2006 around 80,000 first-time buyers – some 20% overall – were providing deposits which they could not realistically have funded out of their own lifetime savings. By implication, therefore, they were getting assistance from somewhere – most likely parents or grandparents. These “assisted” first-time buyers accounted for 38% of young buyers under 30. And this proportion varied greatly on a regional basis. In the most expensive areas – London, the south east and Northern Ireland – half of all young first-time buyers were receiving assistance.
Our new research shows that, since then, the trend of reliance on help from parents – or others – has grown. By the second quarter of 2008 nearly half of all first-time buyers under 30 were receiving assistance.
There are continuing regional differences in the scale of help for first-time buyers. In London and the southern regions, over a half were helped, but even in the most affordable northern regions the proportion receiving assistance is now well over one-third. But nowhere is assistance more pronounced than in Northern Ireland, where in the second quarter of 2008, two out of three young first-time buyers were getting help.
What’s changed since the crunch?
In the 12 months up to spring 2008, typical property prices paid by first-time buyers had not changed. But while assisted buyers are now putting down significantly higher deposits, the typical deposit paid by an unassisted buyer has not changed. As a result, assisted buyers are taking out smaller loans than a year ago to buy properties of the same value, and therefore have smaller LTVs and mortgages that are a lower multiple of their income.
In essence, those who are fortunate enough still to be able to call on parents or others for help have been able to reduce their risk profile – borrowing less relative to the property’s value and their income – while those who cannot remain as stretched as they were before the onset of the credit crunch. One effect of the crunch has been to drive up mortgage interest rates. But because assisted borrowers have been able to reduce their overall risk profile, they have seen a slightly less pronounced rise in borrowing costs than unassisted buyers.
The effect of lenders cutting back on LTV and income multiples means that the number of unassisted buyers is shrinking further, and first-time buyers – a key source of liquidity in the property market – are becoming more reliant than ever on help from their parents.
Perhaps not surprisingly, the most striking examples of this come in areas where property prices are highest and dependence on parental help is the greatest – London, the south and Northern Ireland. In London, the typical assisted first-time buyer had a £67,000 deposit and an average income of £42,000. In very stark contrast, unassisted buyers in the capital had a typical deposit less than a third of this size – just £19,000 – but typically need a much higher income of £57,000.
How deep are mum and dad’s pockets?
We appear to be still some way off the size of correction in house prices that would allow most first-time buyers to buy without help. It is, in fact, demonstrably harder for young people to be able to buy without a financial leg-up from their family. But this presents us with a potential problem.
In an environment of falling house prices and an increasingly negative economic backdrop, we could see less parental help for first-time buyers from the “bank of mum and dad.” Parents seeing falls in the value of their own home – and the equity they hold in it – may be less willing or able to help their children with a deposit.
If this flow of help for young buyers dries up, then opportunities for young would-be buyers to enter the market could be severely limited, and we may see their numbers decrease significantly beyond what are already record low points.
Other ways of helping first-time buyers
As well as realising their own aspirations to become owner-occupiers, first-time buyers help oil the wheels of the housing market. By moving into home-ownership, they create opportunities for existing owners to move. So, what are the implications of the current low levels of first-time buyer activity? And while the number of first-time buyers continues to decline – despite increasing help from parents – what else can be done to help?
We welcomed the various announcements by the government recently of plans to provide more assistance for first-time buyers, including:
the opportunity for all first-time buyers with an income of less than £60,000 to apply to buy a share of their home;
a £200 million allocation for the Housing Corporation to buy new properties on the open market, either for purchase by first-time buyers through the Homebuy scheme or for social renting; and
a new Homebuy Direct shared equity product available on selected newly-built properties.
While these measures will have only a modest overall impact on the housing market, they do have the potential to widen choice for first-time buyers. Homebuy Direct also provides some protection from negative equity for buyers.
The government’s recent announcements also mean that its approach to helping first-time buyers is now more logical, based on the income – rather than the occupation – of those eligible for assistance. It should remove the anomaly by which helping one group of less well-paid workers makes access to home-ownership more difficult for others earning similar salaries, but working in different jobs.
While welcoming a more coherent approach from the government, however, we remain concerned that the existing variety and complexity of low-cost home-ownership schemes could dissuade both borrowers and lenders from participating.
In addition, the government’s measures do not overcome the problem that becoming a home-owner is more expensive in some areas than others. To some extent, this problem is being addressed by help from parents, where they are able and willing to contribute. There is a danger, however, that this sort of help will reinforce more polarised access to home-ownership, with the “haves” prevailing over the “have nots.”
Another possibility is that as economic conditions worsen and housing equity for all home-owners is eroded further, things could get worse for assisted first-time buyers as parental help becomes less readily available.
