I’m not really a ‘glass is half empty’ person, but it really is worth looking at just how tough the market currently is for first-time buyers (FTBs).
The statistics make sober reading and should ring alarm bells in both board rooms and government departments. The percentage of FTB transactions has dropped from 48 per cent in 1998 to 37 per cent in 2005. The nadir was 29 per cent in 2003 and 2004 – even at 37 per cent this is still the lowest transaction level in nearly 30 years. Plus the pressure on affordability has been growing for more than a few years, with interest payments as a proportion of income up from 11.2 per cent in 1996 to 16.3 per cent in 2005. One thing can be predicted, these figures will not be better than that when the 2006 are eventually published. The FTB market is in meltdown. Well, not quite, but very nearly. A healthy FTB market is in the interests of all, so how does the industry go about tackling the FTB issue?
The only way is up?
It would be trite to say that the only way is up but that is what we must hope for. The FTB market has traditionally underpinned the housing market as a whole. However, with the record levels of buy-to-let (BTL) business, the impact of the missing FTBs has been somewhat muted. The Royal Institution of Chartered Surveyors (RICS) revealed the average first-time buyer would need 74 per cent of their annual income to put down a deposit on a house, based on a typical £147,900 home. This compares with just 25 per cent only 10 years ago. House prices remain buoyant and continue to rise and test record levels. Right now, to be an aspiring FTB in the market must be a very dispiriting place indeed.
Social changes are sweeping the UK. Demographics are shifting due to higher divorce levels, relationship breakdown and are creating new classes such as ‘singletons’, for example. The need for single households is putting further pressure on the housing market. The problem with rising house prices is that the FTB is hit with the double whammy of finding a higher deposit and the issue of affordability, just being able to borrow enough to get on the ladder. The reality is that home ownership just gets more expensive and nowhere does this hurt more than in the FTB market.
Improving the FTB’s lot
There are, of course, just a few ‘gimmes’ that can improve the FTB’s lot. The easy win would be the government to take the brave step and raise the Stamp Duty threshold to £188,000. Why £188,000 you may ask? Simply because this is what the average property costs in the UK. The last time Stamp Duty was raised was by a paltry £5,000 in March 2006 to £125,000. To put this in perspective, following that increase a national estate agent reported, that in its database of nearly 600,000 properties, only 18.3 per cent were valued at under £125,000 nationally, while in London only 2.2 per cent were valued at under £125,000. This must be soul destroying for many FTBs as when saving a deposit clearly a large slice of this will be taken up by Stamp Duty. This needs immediate government attention as the current regime is inequitable and simply unfair.
There are other options available from outright ownership that offers the benefits of home ownership albeit at a lower entry cost. These split down into four definable schemes. There are some caveats as some schemes are only available to key workers, such as health care professionals, firefighters, for example, or council and housing association tenants.
c Conventional shared ownership – this option is for those who cannot afford to buy a home on the open market. Under this scheme, the FTB buys a partial share in a home in the region of 25-30 per cent, the remaining balance is owned by a housing association and the owner pays rent on that portion owned by a housing association. After a year the owner can ‘staircase’ and expand their share of the property.
c Do-It-Yourself shared ownership – this option is offered by local authorities. This scheme allows the FTB to select a property on the open market and then buy it on shared ownership terms with the local housing association. Again, rent is paid in the non-owned share.
c Homebuy – this scheme allows home buyers to get a 25 per cent loan from the local housing association to fund the purchase of a home. Should the customer qualify, they can apply for a loan from the local housing authority, and fund the remaining 75 per cent of the property price with a conventional mortgage. The 25 per cent is paid back to the housing authority when the property is sold. This is mainly open to council or housing association tenants.
c Key Worker – this scheme is open to key workers, nurses, doctors, teachers, for example, mainly in London. It allows key workers to find a property on the open market. The maximum loan is £50,000.
With the current plight of FTBs, the take up on these schemes has never been higher and offer an excellent buying opportunity for those who want a different route to homeownership. Again the government will be a key driver in not only making this happen via existing and new legislation but providing the relevant bodies with the budgets to achieve better homeownership.
Lender innovation
It is incumbent on lenders to innovate as well. Product managers should be researching and innovating. I expect to see a number of innovative schemes to aid FTBs enter the market.
There is always the lazy approach with lenders taking the option to relax affordability or increase income multiples to tempt more FTBs. This may be tempting for some but in reality this does not really begin to solve the problem. There will always be the caveat that the FTBs have to pay back what is borrowed and be comfortable with their level of payments. Over indebtedness and the possibility of payment shock if a short-term rate has been taken must be uppermost in the underwriting process.
This of course does apply particularly to the 100 per cent mortgage. These schemes are once again popular as a method of getting on the ladder. However this can lead to the temptation to apply for mortgages larger than normal. In many cases 100 per cent mortgage schemes are only applicable to aspiring professionals and or graduates who are forging a career and can expect rapid promotion and pay rises.
One area that has been underplayed is that of the role of parents. Either frustrated at their offsprings’ lack of progress or just wanting their place to themselves, parents are increasingly helping their children get a foot on the ladder. Figures show that, on average, parents are stumping up £18,000 to help their children buy their first home. It does not always stop with the deposit and one-in-five FTBs turn to their parents for help with the deposit. The mortgage market has developed some very innovative mortgages for those with a small or no deposit that allow parental income to be used to improve borrowing capacity. Some schemes share ownership between the parents and the property is registered in the names of the parent and the child. This is excellent innovation and should be applauded. Again this is an excellent example of an industry ‘stepping up to the plate’ when needed.
The reality is that entry to the market has never been harder. The commercial reality is that the market needs a vibrant FTB sector as they are an essential component. Lenders have innovated where they have seen a marketing opportunity. However the extent of that innovation has to date been somewhat limited. There are alternatives to outright homeownership and the success of these schemes is a symptom of the plight and frankly desperation of the FTB. It is crystal clear that the government has a clear role to play in the housing market and especially that of the FTB. Outside housing policy, the government could improve the lot of the FTB by making adjustments to the Stamp Duty threshold. As the saying goes, every little helps. However with house prices at their current levels, the FTBs options are very limited.
