Chancellor Gordon Brown’s pre-Budget report last week once again put the plight of would-be first-time buyers (FTBs) in the spotlight. There have been pages of news stories, comment and analysis, mostly highlighting the lack of any concrete measures to tackle the growing problem.
The biggest development was the announcement that a further 160,000 families would be helped onto the property ladder via shared equity schemes. Yet most of the industry reaction to Mr Brown’s report came in response to what the Chancellor did not do – namely, change the threshold of Stamp Duty – which remained at £125,000.
According to figures from the CML (Council of Mortgage Lenders), there were around 369,000 first-time buyers in 2005, the highest number since 2002, borrowing more than £40 billion pounds and accounting for in excess of 37 per cent of all borrowers, both at their the highest levels since 2002.
The average age of borrowers was 29, which has been rising steadily since the CML started tracking the data in 1974 when the average age was 26. Last year the average income multiple was 3.07, the highest it has ever been, with interest payments accounting for 16.3 per cent of average income, the highest it has been since 1992.
But is there much the government can do? Is it perhaps the role of the mortgage industry to address the problem of FTBs? For the would-be buyer at the bottom of the property ladder, it seems the first rung gets pushed further and further away every year.
The government
According to research by the CML, the wider public expects the government to do more to help first-time buyers. The research, carried out jointly between the CML and YouGov, found that 88 per cent of respondents believe it is now either “very difficult” or “more difficult than ever before” for young people to buy their first home.
The study went on to find that 78 per cent of people felt something should be done to make it easier for young people to buy, with 79 per cent saying it was the job of the government to help, 66 per cent saying it was down to local authorities, and 61 per cent believing it was down to mortgage lenders.
Top suggested government initiatives were the abolition of Stamp Duty (66 per cent), subsidies for first-time buyers (65 per cent) and the reintroduction of tax relief/MIRAS (63 per cent). Respondents felt lenders should introduce initiatives such as lower interest repayments at the start of a loan (68 per cent), longer repayment periods (62 per cent) and lower interest rates (62 per cent).
Ray Boulger, chief technical manager at broker Charcol, is wary of too much meddling by the government. He points out that schemes such as tax relief or incentives for first-time buyers would be difficult to police. “If the government becomes too involved they will solve one problem and then create other,” Boulger says. “It is better for the market to come up with solutions.”
Stamp duty
Stamp duty was pegged at £125k by Gordon Brown, which is around £70,000 below the average price of a property in the UK. Lenders, brokers, commentators and even former CBI chief Sir Digby Jones weighed into the government saying that the current threshold is too low, with the hardest hit being first-time buyers. Portman Building Society’s Matthew Wyles described stamp duty as “the Chancellor’s favourite stealth tax”, claiming that “this levy is particularly unfair because its burden falls disproportionately upon the shoulders of those least able to afford it – first-time buyers”.
Alliance & Leicester followed the same line, citing its own research that found that six out of ten first-time buyers in the UK are looking for homes above the stamp duty threshold, rising to nine out of ten for people living in London. Stephen Leonard, A&L’s Director of Mortgages says: “Not addressing the issues of stamp duty will deter first-time buyers from getting on the property ladder, with an effect on the entire property ladder.”
Many critics point out that the stamp duty threshold has not kept pace with inflation, particularly as it has only recently been increased to £125k from £60k. Ray Boulger believes changes should be made to stamp duty, as it is one of the government’s most powerful tools for helping FTBs.
He told Mortgage Introducer: “Most of what can be done to help first-time buyers relates to tax relief. Stamp duty is the most obvious route and I think the Chancellor has done first-time buyers a huge disservice in not increasing the threshold in line with house prices. It is quite clear that previous increases in stamp duty are considerably less than they should be to get it level pegging with the increases in property values.”
Boulger says that although an increase in stamp duty would result in less tax for the government, the boost such a change would give to the property market in terms of extra buyers, would largely even out any drop in tax income. He explains: “Increasing the starting threshold to the average property price of £200k would help out 80 per cent of first-time buyers. Brown talks a good talk, but he doesn’t walk the walk.”
James Cotton, mortgage expert at brokers L&C, agrees that the threshold is too low, but questions how much help an increase would be to those buyers with at the very bottom of the affordability graph. He says: “I share their disappointment that Stamp Duty is nowhere near in line with house prices, but even an increase would still not help those people than cannot afford a mortgage.”
The only comment the Chancellor did make about stamp duty is that from next year new-build carbon-zero homes would be exempt from the tax. However no details have been released about how a property will qualify as a carbon-zero home, prompting the CML’s head of policy Jackie Bennett to comment cautiously: “In theory, we welcome the Stamp Duty exemption for most newly-built carbon-zero properties. But we will need to see the detail before we can assess the impact of this measure.”
Shared equity ownership
Critics say that one of the biggest problems facing the UK property market is the lack of affordable homes. It estimated that an additional 200,000 new homes need to be built each year to keep up with demand, with more emphasis on affordable housing. At present there are not enough homes, so demand pushes up the value of properties.
A review of the planning system by Kate Barker urged for local authorities to have more flexibility in land use, helping assisted housing through shared homeownership. However Barker’s proposals have been on the table in some shape or form for a couple of years and the Government will only respond with its own proposals in a White Paper due in spring 2007.
In response to the Barker Review, Ray Boulger called for the Government to stop “micromanaging” the issue of planning and housing, doing away with density requirements and allowing developers to build houses to meet public demand, such as more family homes.
The Government launched various HomeBuy schemes a few years ago, whereby purchasers buy 50 per cent to 75 per cent of a property, with Government money funding the remaining stake. Depending on which scheme, house hunters can apply to buy from the open market, via specific affordable housing developments, or buy their own home if they are in a social housing project.
The Chancellor’s announcement last week that a further 160,000 families would now benefit from shared equity schemes was light on information and received a mixed response. Adrian Wells, director general of the Building Societies Association, welcomed the initiative, saying: “There has been a fundamental miss-match between supply and demand. Helping people into homeownership is core to building societies. This is why they have been at the forefront of delivering the Government’s shared equity scheme. It is not the only answer, but 160,000 more families will benefit from owning a stake in their own home. The Chancellor has thrown down the gauntlet to lenders.”
The CML also welcome the announcement, but Jackie Bennett went on to say that it was “no substitute for tackling the main cause of affordability problems, which is the significant imbalance between housing supply and demand”.
Melanie Bien, associate director at broker Savills Private Finance, says the announcement was “nothing new”. She says: “This has all been announced before and 160,000 households to be assisted into homeownership through shared equity schemes by 2010 is still a drop in the ocean.”
This view was echoed by the National Housing Federation, whose chief executive David Orr says: “Shared equity schemes alone will not end the housing misery of millions of people on moderate and low incomes. (We are) calling for 150,000 new affordable rented homes and 60,000 new low-cost ownership homes in the Comprehensive Spending Review of 2007.”
Some of the first HomeBuy schemes were announced this week by English Partnerships, who will be making 15,000 new-build homes available to people via its First Time Buyer initiative, with sites in London, Manchester and Portsmouth. Buyers must take a stake of at least 50 per cent in the property, with English Partnerships funding the remaining chunk.
Normally in shared ownership schemes, on top of their mortgage commitments, buyers also have to pay rent on the percentage owned by the scheme organiser. But with English Partnerships rentals fees are 0 per cent for the first three years. Buyers can also increase their stake, but if they sell the property any profit is shared with the equity partner in line with the ownership split.
Robert Davies, spokesperson for English Partnerships, says the scheme was aimed at people who could not afford to buy on the open market. He told Mortgage Introducer: “The first-time buyer initiative is open to local people that are considered in need by their regional housing board. We identified four developments that were already being built that we felt were suitable for First Time Buyer initiative because we wanted to quickly roll out the programme.”
Potential buyers can apply for the scheme via their local HomeBuy agent, who can be contacted via the Housing Corporation website (www.housingcorp.gov.uk). Davies says that further schemes will be announced in the near future, including sites that will be part of the government’s affordable housing competition, where homes will be built and sold for under £60,000. Davies says that many of these properties will also be carbon-zero.
However, many key workers, who are some of the most likely beneficiaries of the government’s HomeBuy scheme, say they do not know enough about the initiatives. Research carried out by Teachers Building Society found that 90 per cent of education professionals said they were not well informed of the HomeBuy programme.
Teachers Building Society offers 100 per cent mortgages for teachers buying under shared-ownership schemes. Mike Hislop, Marketing Manager, Teachers Building Society, says: “These are worrying statistics, which come as the government expands the existing scheme to incorporate Open Market HomeBuy, which enables key workers to purchase 75 per cent of a property, with a regular mortgage combined with an equity loan of 12.5 per cent from selected lenders and a further 12.5 per cent equity loan from the government. Although the Royal Institution of Chartered Surveyors says the government's Open Market HomeBuy scheme will only help 20,000 buyers over five years, it is still imperative key workers are made aware of the schemes out there to help them.”
Market initiatives
The issue of funding shared ownership schemes raises the question of how much input the mortgage industry can have into the first-time buyer problem. Some of the HomeBuy schemes will be partly funded by lenders also taking a stake in the ownership, around 12.5 per cent, with their reward again being a share on any profit when the house is sold.
Although only a handful of lenders have agreed to take part in the government’s scheme, Ray Boulger thinks that its success might trigger similar private initiatives, with lenders setting up private shared ownership schemes where they retain a slice of the ownership. He says: “The building societies may look at this as part of their mutual agendas, but they will also look at it with a commercial view and there is no reason why other lenders would not look at it to make a profit.
“The lender would be taking a gamble on property prices. I think that many lenders will not be keen to do this, but the private sector may be willing – investors such as pension funds, estate agents or private companies. There is no reason why the private sector cannot develop a scheme to satisfy the demand – but at what cost?”
There are already a host of other mortgage products and schemes designed to tackle affordability and therefore help FTBs. One of the newest trends is that of parents, and even grandparents, helping their offspring buy property. Tricia Lonorgan, conveyancing director at solicitors Barnetts, explains: “We are noticing a lot of FTBs are being supported by parents in that they are paying deposits etc for them, in some cases they are remortgaging their own homes to provide this.”
Her colleague, Tony Swift, partner at Barnetts, adds: “Government figures show that 14,000 people a year are releasing equity from their home to buy another property which in many cases will be for their children. Yvette Cooper, the government housing minister, has acknowledged that for those youngsters who can’t look to their parents to help them buy their first property, the outlook is pretty bleak.”
Other organisations are taking a different tack, such as the Professional Contractor’s Group (PCG), a not-for-profit group set up help freelancer workers, which has joined forces with financial advisers ContractorFinancials to provide mortgage deals tailored for PCG members, who won’t be charged a broker fee.
Tony Harris, managing director of ContractorFinancials says: “We have worked closely with many of the big high-street lenders to negotiate income verification based on an annualised multiple of the current contract rate alone, removing the need to use accounts and overcoming one of the biggest hurdles that freelancers face.”
Another innovative initiative is The Property Investment Market (www.thepropertyinvestmentmarket.co.uk), which is set up like a stock exchange and enables investors to buy and sell shares in individual residential properties, as they would trade shares in quoted companies. Properties are listed on the exchange so investors can view the property details, research the area and analyse the performance of comparable properties.
The company says the scheme allows prospective first-time buyers, concerned parents or grandparents, or buy-to-let enthusiasts to buy shares in specific residential properties, which are rented out and managed by lettings agents. This enables investors to benefit from rental income – which is paid as a dividend – as well as from potential increases in house prices.
James Cotton at L&C believes the mortgage industry is doing as much as it can to help FTBs. He explains: “Lenders and brokers are helping people within the scope of the industry and the products that are available. There are 100 per cent mortgages for people without deposits, and higher income multiples. Some people have other options, such as their parents being guarantors, so the industry is helping.”
But in the final analysis, he believes there are many people that will never reach the property ladder. “Ultimately this is not enough for people who cannot afford a mortgage. The government has come up with some measures, but overall this is not making a dent. For a lot of people it doesn’t make a blind bit of difference. If you are earning £20,000 and a house costs £120,000, you just can’t afford it.”
