The number of first-time buyers (FTBs) entering the market fell to 25,600 in February, the lowest level in almost two years. It’s a downward trend that began in December 2006 and reflects the continued rise in house prices, coupled with recent Base Rate hikes and the fear of more around the corner.
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The figures released by the Council of Mortgage Lenders (CML) make for illuminating reading. Despite the low number of FTBs, the amount of money being advanced by lenders is at its highest ever, averaging out at £114,000. Yet the average income remains around the £34,000, as it was in June last year when the average advance was £110,000 and almost 40,000 FTBs took out a mortgage.
Unfortunately there seems to be no solution in sight to the dilemma facing FTBs as commentators predict further increases in houses prices, possibly even at record levels, despite the regular declarations by critics of an imminent property crash – something they have been predicting for a number of years. Add to that an estimated 55,000 shortfall in new build properties this year – again, a trend that is likely to rise – and it’s clear that demand continues to outstrip supply.
As far as the mortgage industry is concerned, there are arguably more products and schemes available now than ever before designed specifically for FTBs. From 100 per cent loan-to-value and guarantor mortgages, through to government-backed shared ownership schemes, both lenders and brokers agree that borrowers are well served when it comes to helping them get their first foot on the property ladder.
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But if the numbers of FTBs continue to fall, perhaps it is time for direct intervention from the government. “I’m not sure what form intervention could take,” says Bernard Clarke, communications manager at the CML. “House prices have been rising far more than incomes for such a long time, which makes it difficult for FTBs. There may be potential for more shared equity schemes, but the scale of help available is for too small a number of FTBs, so it would only have a modest impact.”
A hot topic
Clarke says that the problem facing FTBs is a topic that the CML’s members discuss regularly. He says: “Clearly affordability is one of the key issues confronting the industry, and it has been for a long time. Lenders have been very innovative in trying to help FTBs, but as property prices increase faster than incomes, it is becoming increasingly difficult for lenders to tackle the issue.”
Those borrowers that are entering the market for the first time are being cautious, with a large majority taking out a fixed rate mortgage to give themselves some security over the next couple of years. According to CML figures, 87 per cent of FTBs took out fixed deals in February, which was up from 84 per cent in January, which itself was a record.
The CML’s figures also revealed that in February, FTBs made up 36 per cent of all house purchase mortgages that month, which is in fact slightly higher than the 35 per cent of the previous four months. The total value of loans, however, was down to £3.25 billion, the lowest amount since January 2006, with the start of the year traditionally a low point.
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Figures released by Propertyfinder
.com paint a more depressing figure, claiming that the number of FTBs fell to 22 per cent in March. Likewise, the National Association of Estate Agents reported that 40 per cent of its members noticed a downturn in buyers during February and March, which it claims came as a direct result of the interest rate increase in January.
Propertyfinder.com says that currently the average FTB would have to shell out £2,650 more in mortgage payments and Stamp Duty in their first year of ownership, compared with buyers entering the market at the same period last year. Nicholas Leeming, director of Property
finder.com, believes the plight of FTBs could actually change the shape of the entire market. He explains: “Demand at the bottom end of the market is definitely calming, and there are signs that the rest of the market is following.”
Ed Stansfield, property economist at Capital Economics, agrees, saying: “FTB numbers have been gently drifting down. They do not have much of a choice – either stretch themselves with larger loans or sit out and wait for easier times. It is very tough at the moment. This cannot be good for the long-term outlook of the market. It is another argument for expecting the market to get softer as the year goes on. The outlook for 2008 will be pretty soft.”
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Lower property prices – or at least a slower increase in property prices – could well tempt more FTBs if interest rates do not soar. History tells us, however, that if property does become more affordable, demand will go up again prices will creep up once more. It is a vicious circle.
Increasing supply
As far as broker Danny Lovey is concerned, the solution to the house price dilemma is simple: build more houses. Lovey, who runs The Mortgage Practitioner in Basildon, says that FTBs will struggle to afford new homes while there continues to be an imbalance between the number of houses available and the number of people that want their own home. He cites the most recent House Price Index published by Nationwide, which put the current shortfall of new properties at 55,000, and says:
“We have got to acknowledge the problem is simply that there are more buyers than sellers. Demographics have changed – there are more single-parent families and people living on their own, and immigration is on the rise, so more people want property.”
Lovey does not agree with further government intervention, believing that it could skew supply and demand even further. He explains: “I am against artificial stimuli because this offers the ability for some people to push up prices because of the increased demand and property prices will continue to spiral and the market becomes distorted.
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“The market has already been distorted by buy-to-let (BTL) investors who are buying the kind of property that FTBs would normally be interested in. These are people that no longer trust pensions and have voted with their feet and gone into bricks and mortar – but this has triggered a house price explosion.”
Lovey also feels that too many new build property developers have either concentrated on building bigger, more expensive and therefore more profitable family homes, or, at the bottom end of the market, concentrated on flats. Although such apartment developments are usually of high quality, the reality is that most FTBs would prefer a two-bedroom house for the same money, or even if it were slightly more expensive. Instead many novice BTL investors have bought flats, believing they will be popular with tenants, enabling them to charge high rents. But Lovey says that the South of England is awash with unoccupied flats, which in turn could lead to a further increase in defaults among novice BTL borrowers, flooding the market with cheap flats.
“If there were to be a correction in the marketplace the price of flats would fall like a stone,” he says. “If there were to be a meltdown in the flats sector, then that could be good for FTBs, but it could also have a knock-on onto two-bedroom houses, three-bedroom houses and so on.”
Shared equity
An increasing popular option with FTBs is shared equity schemes that offer people the opportunity to buy anything from their own housing association property through to homes up for sale in the general marketplace. The basic principles of all shared equity schemes are the same. The borrower buys a stake in a property, usually around 50 per cent, funded by a mortgage, and the scheme operator retains the remaining portion on which the borrower has to pay rent. The borrower is normally able to buy additional chunks of equity up to full ownership or they can remain a partial owner.
When the borrower wants to sell, depending on which scheme they are in, they either sell their share back to the scheme operator or sell it on the open market, paying back their equity partner, but retaining any profit they make on their share. At a time when recent research shows that around 70 per cent of key workers such as nurses, police and fire-fighters cannot afford to buy property in the town in which they work, shared equity is a good solution for such people. However, shared equity is also available to other local residents, not just key workers.
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Mark Vaughan, director of sales and marketing at Notting Hill Home Ownership (NHHO), a shared equity scheme offering 16 new build developments in London, says that although such initiatives have primarily been available in the capital, the FTB problem will trigger growth across the rest of the UK.
He explains: “London and the South East have had this problem with affordability for FTBs for a number of years, but now the rest of the country is catching up. FTBs have to look at their options. Often they don’t have the deposit, or if they do they do they can’t afford the mortgage repayments.”
Vaughan says that NHHO has a number of schemes, including a trial project that offers would-be owners an equity stake from as little as 10 per cent. The organisation charges a monthly rent equal to 2.75 per cent of the share of equity that it retains. For many people, not only is this option their only chance to own their own home, it also gives them a leg up on the property ladder.
Vaughan says: “Last year 141 households out of the 3,500 in our schemes bought the remaining shares of their property. For others, when they sell their shared equity homes, they no longer need our help and can buy on the open market.”
Despite the success of NHHO, Vaughan says that market forces are even pushing the price of shared equity schemes out of the reach of some potential FTBs. He explains: “Property prices have gone up so it has become more and more difficult to reach people on average salaries of between £18,000 and £19,000 a year. They still can’t afford to buy, even through shared equity. The average salary of our buyers now is £26,000.”
Land prices
One of the main problems, Vaughan says, is the price of land – an issue prevalent in the private sector. Often land developers sit on a parcel of unoccupied land waiting for its value to increase before they build property, looking for maximum profit. Vaughan says that local authorities have the power to direct property developers to include low cost housing and amenities in their projects, but they are not able to force developers to start building.
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NHHO suffers from the same problem and unless it is given land for free or at a discounted price, this expense pushes up the overall cost of the development. That is why it is piloting its 10 per cent shared equity scheme in an attempt to reach more people.
Vaughan says that although attracting lenders to support the 10 per cent scheme is difficult, he is encouraged by the way mortgage providers have responded to shared equity in general. “It’s getting much better,” he says. “Five years ago there were few products available. But what has happened is that affordability has become an issue, so there has been an increase in the number of lenders offering mortgages and the choice of products has become wider and more competitive.”
Product innovation
Alongside the wide range of products addressing affordability, such as 100 per cent and higher LTV loans, mortgages for graduates and professionals with higher earning potential, and mortgages designed to allow parents to help their children, borrowers are considering other ways of buying their first property.
Websites such as www.co-buywithme.co.uk have been set up to match strangers with the aim of buying together, although anyone considering this route should be well aware of the legal wrangles involved, as well as the issues of living with a stranger. Research by National Savings and Investments showed that 25 per cent of Brits would even consider living in a cheaper country for a few years in order to save enough money for a home deposit. Spain, Australia, New Zealand and the US proved to be the most popular destinations, but considering the cost and hassle involved in moving to and from these countries, whether or not this is a viable option is arguable.
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There are, however, a growing number of people buying their first home in some of the cheaper parts of Europe, particularly countries like Bulgaria and Turkey, with a view to building their equity through the booming property markets there. Tricia Lonorgan, conveyancing director at Barnetts Solicitors, explains: “It has been said that FTBs are now looking to buy their first home abroad, in order to make a quick profit to enable them to put a deposit on a home in the UK within a few years. However, given the continual rise in property values and the lack of opportunities available, this objective may never be attained.”
Until the problem of supply and demand of property in the UK is addressed, it likely that property prices in this country will stay at a premium and out of reach of many, even if there is a major softening of the market.
As Mark Vaughan of NHHO concludes: “Unless there are artificial controls introduced into the market, there will always be a problems for FTBs. It has got to the stage where some form on intervention is necessary because parts of London are becoming ghettoes for the rich.”
