Phew, we can all breath easy – expert economists are forecasting a slow and steady year for the housing market but have allayed any fears of a crash. The Centre for Economics and Business Research (CEBR) forecast house prices will rise steadily in 2006 as last summer’s interest rate cut will buoy the market in early 2006 but a slowing economy will prevent house prices from increasing too quickly. However at the end of the day the essential principle of ‘supply and demand’ will prevent a crash as the demand for property continues to exceed the supply of affordable housing.
Sounds interesting but what does this mean for the mortgage market? Does it mean we see the return of first-time buyers, ready to take a tentative first step on to the property ladder now their fears of a crash have been laid to rest? Quite possibly, but due to a fundamental shift in the attitudes of the typical first-time buyer, we are extremely unlikely to see first-time buyer activity returning to the heady days of 50 per cent of all mortgage transactions.
Last year, GMAC-RFC commissioned a major piece of research entitled ‘First-time buyers: Understanding New Trends’. The purpose of this research was designed to dig beyond the statistics, to discover what potential first-time buyers were really thinking. The findings surprised us in many ways. Although prices and levels of consumer debt were a deterrent to making that first home purchase, only half of the non-homeowners questioned said they would buy immediately if these problems were solved.
Shifting attitudes
The research showed there was a discernible shift in the attitudes of potential first-time buyers to the timing of their entry into home ownership, which is being fuelled by the availability of privately rented alternatives. In fact, it was clear that renting suits a majority of these young non-homeowners, who value a lifestyle founded on flexibility and independence, and who are keen to live near friends in popular districts or towns. Instead, they preferred to spend their money on socialising – or as we say it’s a POP Culture (Partying Over Property).
The majority of those researched said they were not yet prepared to make a long-term commitment to property ownership and the message coming across loud and clear was that individuals wanted to delay until later in their lives making any kind of commitment, whether to particular jobs, to geographical areas, to individual relationships or to buying a property.
The fact that the average age for marriage is now 31 for men and 29 for women compared to 25 and 22 respectively as recently as 20 years ago, with the average age of first-time buyers increasing from 30 to 35 over the last ten years, further underpins this. There was a sense that freedom and flexibility is more available to this generation than perhaps any other, and it is to be grasped before settling down.
BTL importance
An adjacent message to emerge from the research was that the buy-to-let market, which is principally responsible for making privately rented accommodation available to meet this demand, has an increasingly important role to play in the social infrastructure – something that it does not always receive credit for. Also, it is buy-to-let that will boost the business of intermediaries over the next year as people continue to choose to invest in property as a long-term solution – particularly with the problems associated with annuities and the demise of final salary pension schemes.
Recent ARLA research shows the majority of landlords are buying property in order to seek long-term capital growth. Over half of all investor landlords are looking to create a nest egg for themselves some 15 years ahead. What’s more, nearly two-thirds of the investor landlords said they expect to enlarge the size of their portfolios during 2006 and this is the second consecutive quarter to show this upward trend.
The fact that buy-to-let landlords are investing for the long term creates a steady and solid source of business for intermediaries and lenders as nine out of 10 of landlords questioned said they would not sell their investment properties even if house prices should fall.
Affordability
Now, of course, not everyone is happy to rent into their middle age and half of those first-time buyers researched by GMAC-RFC said that affordability was their principal deterrent. For those who do wish to become first-time buyers in the short term, the level of house prices are a clearly a big problem. In 1993 the average ratio of UK house prices to average earnings was just under three and a half to one. By 2004, this ratio had increased to six to one.
Last year it was estimated to have tailed off a little. But, at something approaching six times average earnings, the first-time buyer who is ready and willing to buy cannot do so in many areas of the country. This is why initiatives like the government’s Homebuy scheme are to be strongly welcomed.
Shared equity products could be the answer to this problem. By allowing others to share in a property’s equity growth, the borrower can enjoy a lower rate of interest which, in turn, enables a higher multiple of earnings to be offered for the same monthly outlay as a loan at a more normal multiple. But there needs to be more flexibility, and less regulatory prescription, if lenders like us can actually sign up, and if Homebuy is to really make a market impact.
The government’s Homebuy initiative is planned to help up to 40,000 people, which is a good but modest start. Potential first-time buyers need a scheme ten times larger than this.
HIP reaction
Yet another development that could impact on the first-time buyer market is the introduction of Home Information Packs (HIPs). Giving first-time buyers upfront a packet of information that they would previously have had to wait weeks for could be a major opportunity, depending upon the extent to which they and lenders trust the information and do not feel the need to duplicate it.
On the other hand an £800 fee on the act of offering a property for sale could deter existing owner-occupiers from putting their properties on the market in the way they have done in the past, thereby increasing house prices further by reducing supply. We will just have to wait and see.
The truth is we just don’t know how the market will react because none of this has been tested. The only pilot that has been undertaken was in one geographical area using HIPs that contained a fraction of what they are now due to include, in circumstances where the sellers did not have to pay for it. What is really needed is a ‘dry run’ of HIPs that is a real and robust test of the process from start to finish. If necessary, this would allow adjustments to be made to minimise any adverse impact on first-time buyers and others.
Understanding motivation
For those intermediaries looking to capitalise on first-time buyers returning to the market it is essential to understand the motivation and lifestyles of the younger time-poor instant gratification generation. People are no longer willing to save up for years to provide a substantial deposit, nor are they willing to wait around for a mortgage process that takes weeks to complete. Fortunately there are a few online systems that allow intermediaries to provide instant and binding decisions at the point-of-sale, thus satisfying the need for a speedy response. Intermediaries can promote this convenient service – and its fast turnaround – to appeal to the potential first-time buyer with short attention span.
The key fact to remember is that first-time buyers are delaying their first property purchase, not writing it off. The British obsession with owning your own home is as strong as ever and it is not a case for most of ‘if’ they will buy a property but ‘when’. In the meantime, the historically low first-time buyer numbers in the market has seen a natural hedge with the increasing buy-to-let market.
It is no coincidence that as first-time buyer numbers declined the buy-to-let market grew. Add to this the fact remortgaging is now the norm, rather than the exception, and the fact that first-time buyers are staying away from property purchase – either by choice or financial constraint – will not be sending any alarm bells to intermediaries.
Jeff Knight is director of marketing at GMAC-RFC
