While there is much news about the ongoing price war at lower loan-to-value levels, the outlook for potential homeowners who have small deposits has not markedly changed, despite the occasional chink of optimism that penetrates the fug. Indeed, when you analyse much of this supposedly ‘good news’ related to first-timers you find that it provides little comfort for those seeking to get on the property ladder.
A case in point is the recent flurry of excitement generated by the fact that first-time buyer volumes rose to a five-year high in 2012, according to Halifax. While I am not cynical enough to suggest that this is not good news, or a step in the right direction at least, there are a range of mitigating factors that mean the whole story is not quite as rosy as the headline suggests.
More than 216,000 people bought their first homes in 2012 and while this represented a 12 per cent increase on those able to take the plunge on 2011, it is also a rather modest fraction of the 402,800 who stepped on to the property ladder in 2006. Those with a glass half full mindset will say that observing contemporary figures alongside those from before the global financial crisis is not a like-for-like comparison and that the mortgage market cannot be allowed to return to the days of free and easy credit. While I agree with this sentiment on many counts, I also fail to accept that we should accept an inflow of just more than half the number of 2006’s first-time buyer levels as cause for celebration.
Another cause for concern is the average age of today’s first-time buyers. The Halifax survey claimed the typical first-timer was now 30, but the consensus elsewhere seems to be a few years older than this. Indeed, a 50-year snapshot of the UK mortgage market undertaken by the Post Office suggested 35 was a more accurate reflection and said this has risen from 24 in the 1960s.
Perhaps even more worrying is the reliance on assistance from family members to realise one’s property aspirations. The Council of Mortgage Lenders has long admitted that while the average age of Britain’s first-time buyers has remained pretty static around the 20 to 30 mark, the ‘true’ figure – those purchasing property without any financial assistance from family members – is closer to 33.
In fact the impact of the credit crunch has never been more apparent than within the CML reasoning that 65 per cent of first-time buyers had financial assistance in 2012, compared with less than one-third in 2005. This is not to criticise those who receive financial support from their parents – and in recent years the bank of gran and granddad has been doing a strong trade too – but simply to point out that these handouts skew the real picture and are not available to all first-time buyers.
Perhaps the most-telling statistic in all of this, and certainly the one that first-time buyers most regularly bemoan, is the size of deposit now required. No one has suggested we return to the 100 per cent-plus LTV products that helped nudge the UK closer to the economic precipice, but with many of the better deals requiring at least 20 per cent, this level is proving insurmountable to many.
This tough task is compounded by salary freezes and the rising cost of living, meaning that the average deposit now effectively represents around 80 per cent of the annual income from which the mortgage is paid. With many first-time buyers forced to rent while they postpone their ownership dreams, setting aside any money at the end of the month once the bills have been paid is difficult enough, but amassing the sums needed has almost become something of a pipe dream. With rates, and subsequently repayments, for first-time buyers remaining pretty prohibitive, at least the difficulty in squirrelling away a deposit will stand borrowers in good stead for when they actually have to start paying back their mortgage.
The well-publicised Funding for Lending scheme was supposed to be a knight in shining armour, riding to the rescue of beleaguered first-time buyers and small businesses, but it is fair to say that we await confirmation on the progress that has been made. There remains a general feeling that some banks remain intent on using the subsidised tranches to satisfy capital adequacy requirements, as opposed to passing on improved rates to borrowers, and that the programme has not had the desired effect of stimulating first-time buyer activity as yet.
Quite what incoming Bank of England Governor Mark Carney has in store for the scheme is unclear, with mixed messages emanating from his questioning by the Treasury select committee. On the one hand, Mr Carney described the scheme as beneficial because it had encouraged a reduction in funding spreads in the market for banks, but elsewhere expressed concerns on unorthodox policies and, in his written evidence, claimed the “implicit state subsidy for banks needs to be removed”. Of course Mr Carney will have his hands full with bigger issues, and is not technically responsible for increasing first-time buyer numbers, but it is still worth evaluating his exchanges to try and establish wider economic trends. One crumb of comfort from his parliamentary grilling was when he spoke of the need for clearer communications from the central bank to help manage market expectations. First-time buyers obviously need more to fall into place to make a purchase than the Bank giving them the green light, but every little helps at this stage and buyer sentiment and confidence remains an important part of the process.
There is no miracle switch that can be flicked on to alleviate the problems currently facing first-time buyers, but there remains the nagging feeling that more can be done to stimulate activity. Capital adequacy requirements are important to prevent a repeat of the banking collapse we witnessed after the initial credit crunch, but it might be worth re-evaluating if our current rules are fit for purpose or could be tweaked to improve, in particular, first-time buyer lending activity. As many market commentators have observed, parading the Funding for Lending scheme as the solution while such capital adequacy requirements are in place, is akin to giving with one hand and taking away with the other. Or, as I have seen it amusingly described by one economist, loosening the belt while tightening the braces.
One measure that lenders could potentially utilise is that of mortgage insurance, whereby providers deliver policies to help them mitigate the risk of high LTV lending. As mentioned previously, no one is advocating a return to the reckless days of 100 per cent mortgages, but lenders steadfastly refusing – or unable – to offer borrowers home loans in excess of 75 per cent may want to bear the policies in mind if they want to not only increase their levels of new business, but provide a public service in helping swell the ranks of first-time buyers.
All of this may make somewhat depressing reading for our next generation of homeowners, but we need to cut through the misleading headlines and massaged statistics if we are to address the real problems facing first-timers. Mortgage insurance may not be the answer for all lenders, but they are doing their borrowers a disservice if it is not on the list of considerations.
Simon Crone is vice-president commercial – mortgage insurance Europe of Genworth
Key points
The outlook for potential homeowners who have small deposits has not markedly changed, despite the occasional chink of optimism that penetrates the fug.
A Halifax survey claimed the typical first-timer was now 30, but the consensus elsewhere seems to be it is few years older than this.
There is no miracle switch that can be flicked on to alleviate the problems currently facing first-time buyers, but there remains the nagging feeling that more can be done to stimulate activity
