The First Time Buyer's Plight
June, 25, 2008
First-time buyers are the lifeblood of the housing market, and in recent years they’ve struggled as prices soared. Perversely, as prices fall, they now face an even more formidable challenge.
Why? Spiralling mortgage costs and restricted lending criteria caused by the Credit Crunch mean thousand of first-time buyers are unable to purchase a home.
Simple economics dictates that the plight of first-time buyers affects the whole property market. Every rung of the property ladder needs new blood at the bottom so we can all move up. With less first-timers the whole market stagnates.
So, why is this situation so tough compared with the previous problem of unaffordable and soaring prices?
Wary lenders relunctant to lend
Just a year ago the big lenders were offering 100% or even 125% deals to people for sums five times their salary, but these days of reckless lending are over. The First Time buyer now needs a hefty deposit. The Council of Mortgage lenders say that the average deposit required is now 13% of the property’s value.
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This means to buy a property costing around £250,000 someone needs to find £32,500 and that’s before you even factor in the stamp duty, legal fees and moving costs. In London, with the average property costing more than £350,000 the deposit required is around £45,500! Add the other costs to this and you could have bought a property outright in 1990. Two people cohabiting on average UK salaries simply don’t have a chance.
Some lenders expect even higher deposits, with the Woolwich now demanding as much as 20% for many of its deals. The Abbey is continuing to offer 95% mortgages but you can no longer add arrangement fees to the deal, i.e. that two grand plus is up front and on the table as opposed to tacked onto the loan.
Buying a Property Abroad
As lenders dramatically tighten lending criteria, mortgage approvals have plummeted. The British Bankers Association revealed approvals fell by more than 50% in May to a new low of just under 28,000 (just compare this with 1999, when 600,000 people bought their first property). Furthermore the number of first-time buyers has fallen by a staggering 35% in a year.
Big monthly mortgage payments
Even if the First Time Buyer manages to get a deposit together, the prospect of uncomfortably large monthly repayments looms. The price comparison service Moneyfacts.co.uk suggests the average two-year fixed rate mortgage has now risen to 7%. So a £150,000 mortgage will now cost more than £1,300 more than at the beginning of the year.
Rising Rents
More market forces: the opportunity to save for a deposit diminishes as rents across the country rise. It’s a classic case of demand and supply economics, as first-time buyers fail to get on the property market they need to rent. The Association of Residential Letting Agents says 40% of agents are reporting that they have more people looking than properties on their books. This increased demand means landlords can charge more. Ironic, given the problems in the buy-to-let market!
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In some areas of the country rents have increased by nearly a third, with the South-West, East Anglia and Yorkshire being particularly badly hit. If you add in rising food, petrol and fuel bill costs, saving for a deposit is now but a dream for thousands of people who perhaps a year ago were seriously considering buying.
Is now a good time to buy anyway?
Lenders can be blamed for reckless lending, which led to the whole problem in the first place. And with house prices falling and endless headlines about negative equity and repossessions, have potential first times just stopped even looking? Why buy a property with a big deposit and suffer massive mortgage repayments just to watch the value of your property fall?
As we’ve highlighted, the problem is that without the first-time buyer the whole housing market will stagnate even further. The Government certainly knows this and is desperately trying to attract people with new initiatives aimed squarely at key workers and first-time buyers. This is tough on non- “key Workers” and wouldn’t it be fairer to simply cut stamp duty on the first property a person ever purchases?
Saving for your children? Child Trust Funds
Many in the property business are arguing that Stamp Duty is punitive and unfair on first-timers... why make people face complicated private / public ownership deals when you could simply remove the tax burden in the first place. But will a hard up government want to lose even more revenue?
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SaveBorrowSpend Philippa Adam
