With many first-timers put off by high prices, what can be done to help? Andrew Frankish, operations director of Mortgage Talk, examines the options.
A lot has been said recently about the plight of the first-time buyer. There are plenty of statistics available to demonstrate that the first-time buyer market is at crisis point, but have we left things too late? Is there a danger that first-time buyers will disappear completely? And, if so, what are the implications?
This has been a recognised problem for eighteen months. The age of first-time buyers has been gradually increasing as their deposit requirements have spiralled out of all relation to the rate of inflation over the last few years.
Gordon Brown, in his April 2003 budget, indicated that something must be done to ease the plight of the first-time buyer but as yet the government has singularly failed to act. Of course, the first-time buyer problem is compounded by the UK’s unique economic circumstances. Despite interest rates remaining very low we really do have a two-stage economy; manufacturing is very much in the doldrums, while confidence in the housing market is strong. The latter is almost self-perpetuating and is mainly fuelled by low interest rates, which continue to encourage relatively high levels of borrowings among second- and third-time buyers and also place higher-priced properties within reach of more people. Supply is squeezed, which in turn further pushes prices up.
If we examine the situation logically, someone who bought their first house, say, ten years ago is in an enviable position. The property market at that time was weak and interest rates were significantly higher than today's levels. What this translates to is the fact that this typical buyer will, by now, have some substantial equity built into their house. As such, they will be able to move to a larger property without needing the size of mortgage that the average first-time buyer would need just to jump on the property bandwagon. However, this doesn’t benefit current first-time buyers, who have seen their buying power severely eroded by successive hikes in property values. Recently, Paragon published the results of a survey that showed that only 10.5 per cent of its applicants were first-time buyers in 2003, versus 10.8 per cent in 2002. Moreover, buy-to-let applicants comprised 11 per cent of borrowers in 2003 as opposed to only nine per cent the previous year.
And figures from the Council for Mortgage Lenders paint an even more worrying picture. For the industry as a whole, first-time buyer mortgages now only make up 30 per cent of total cases, versus a long-term trend of 45 per cent over the last decade.
Inevitably, this situation causes problems in the marketplace. It distorts house prices and alienates a whole class of today's young people, who simply feel priced out of the housing market. Given that many first-time buyers struggle to save a sizeable deposit, they have to borrow a large proportion of the purchase price of their first property which, taking recent price rises into account, means they will find it difficult to make ends meet, especially if interest rates rise as has been predicted.
In this climate a property market novice will be forgiven for feeling like the ugly sister. But what can be done to help first-time buyers make that move?
Help yourself
One way to get onto the ladder is to buy with friends. This is an idea that newly earning workers have used for many years. But with prices rising so steeply, this is a concept that more people are taking up later on in their careers. A couple of caveats here, though.
When friends – as distinct from couples and partners – decide to co-own, it is always wise for them to do so as tenants in common. This means that each party owns a pre-agreed percentage of the property, and this cannot be changed without the express consent of the other co-owners. It also means that more than two people can share ownership of the house or flat.
The converse is to own the property as joint tenants, which is the usual way in which spouses or long-term cohabitants possess property. The problem here for friends is that the split of ownership is not exactly distinct and, if one friend should pass away, his or her share automatically reverts to the survivor. Fine if you're married, but not ideal for work colleagues.
Another idea is to rent out rooms to friends or colleagues to help pay the mortgage. But make sure that you provide them with a suitable agreement that simply offers them a licence to occupy on a non-exclusive basis. The last thing you want is for a lodger to claim rights over your property on the basis that they have made contribution to the maintenance, repair and upkeep of the property.
Government policy
The National Association of Estate Agents recently called for the introduction of a fairer system by suggesting that stamp duty should be graduated. This certainly bears thinking about, with the £60,000 threshold not having been indexed for over ten years and now completely out of date. A decade ago only a third of properties were subject to stamp duty; now it is 95 percent. If the Chancellor wants to maintain his budget commitment to 70 per cent home ownership in this country, the Government needs to act to make starter homes more affordable.
Ideally, stamp duty should be abolished for first-time buyers to help them to gain a foothold on the home buying ladder, as well as supporting the housing market at the bottom. Unless we have a buoyant supply of first-time buyers it is unlikely that we will be able to sustain a strong housing market well into the future, regardless of what happens to interest rates. After all, what is the point of the Government claiming to encourage first-time buyers without offering them any genuine incentives?
Statistics from Cicero Consulting state that 65 per cent of those surveyed argue that the Government should do more to help first-time buyers, with 89 per cent agreeing that it is ‘very difficult’ for first-time buyers to get onto the property ladder. However, lenders are united in their reluctance to be seen to be encouraging unaffordable lending and to avoid a repeat of the all too recent self-certification scandal.
Perhaps more innovative schemes are needed, such as a return to Mortgage Interest Relief at Source (MIRAS) for first-time buyers. Or perhaps offering new borrowers the chance to take the first five or so years of their mortgage on an interest-only basis. Another alternative might be to allow first-time buyers to borrow over an initial forty year term, which can be recalculated to reduce the length of borrowing later on.
The truth is that, whatever the industry or Government comes up with, something has to be done reasonably quickly or the dearth of first-time buyers will have serious consequences for the housing market as a whole.
Parents
Other ideas floated by the press and other commentators include the concept of parental guarantors. Indeed, a recent poll by the over-fifties website fiftyconnect suggests that 63 per cent of its members intend to assist their children to buy their first home. And some lenders have even launched products that are designed to assist with this desire to help children onto the property ladder.
For example, the Bank of Ireland has just unveiled 1start, a so-called combi mortgage that takes an aggregate of the net available income of both the parent and child to increase the amount that can be borrowed. This is genuinely a positive step which, as well as offering a higher available amount of net borrowing, provides class-leading income multiples of four times parental income plus four times the child’s salary.
Lenders
One option might be to use more US-style longer term fixed rates, allowing borrowers to increase their income multiple calculations up to maybe five or six times salary, on the basis that what is affordable now will be even more affordable in the future.