Stepping off the housing ladder?

Back in 2009, we worried that young households would become locked out of home ownership as banks tightened their loan books in response to the global financial crisis.

With no housing equity to use as a down payment on their next home, first-time buyer numbers tumbled from more than 400,000 in 2006, to just 154,500 in the year to June 2009.

Among all the Brexit uncertainty and talk of the housing crisis, you might be forgiven for thinking that little had changed since then.

In fact, almost 360,000 households took their first steps onto the housing ladder in 2018-19, just 10 per cent fewer than their 2006 peak.

In recent months the market has even seen the return of 100 per cent mortgages, with no deposit payment at all.

By contrast, mortgaged home mover numbers are still less than half of peak levels.

While there have been many changes to the mortgage market and housing policy in the past decade, three in particular have had a lopsided effect on first-time buyers and home movers: availability of mortgage finance, the changing pattern of house price growth, and Help-to-Buy.

Gearing up

Perhaps the biggest difference between first-time buyers and home movers is the amount of cash they can afford to put down as a deposit – home movers have generally accumulated some equity through years of home ownership.

It is therefore first-time buyers who have benefitted most from a resurgence in mortgage lending at high loan, low deposit ratios.

The proportion of mortgage lending with a deposit under 10 per cent rose from 1.5 per cent in 2009 to 5.3 per cent in the first quarter of 2019.

This low deposit lending is cheaper now too. In 2009, the average interest rate on a mortgage with a 10 per cent deposit was 6.1 per cent above the Bank of England base rate.

In 2019, that margin is just 1.5 per cent. It is therefore easier and cheaper for first-time buyers to access mortgage finance.

In recent months the market has even seen the return of 100 per cent mortgages, with no deposit payment at all.

Instead, many of these “springboard” loans require the borrowers’ parents to guarantee repayments, or to place 10 per cent of the property’s value in a savings account with the same bank.

For those lucky enough to have parents with money to spare, the ‘bank of mum and dad’ can be a significant helping hand onto the housing ladder.

We have also observed a rise in the average mortgage term, with households choosing to repay their loans over 29 years, on average, in 2018-19 – 8 per cent longer than in 2009.

Home movers are generally older and may not have the option of a longer mortgage term if repayments would continue past retirement age.

Changing patterns

In contrast, the changing pattern of house price growth has made it more difficult for existing homeowners to trade up the ladder further.

House price growth in the year to March 2019 was 1.4 per cent, compared with an average growth rate of 8.5 per cent per year between 2002 and 2007, according to Land Registry data.

This slower rate of house price growth and tighter restrictions on mortgage lending mean it is no longer possible for households to trade aggressively up the housing ladder.

Instead, we have seen homeowners choose to extend or renovate.

Many of those younger households who would normally have bought these properties are instead looking to new-build homes, with a little help from the government.

Government support

While Help-to-Buy is open to home movers, first-time buyers have dominated take-up of the scheme: they made up 83 per cent of all Help-to-Buy transactions in 2018.

171,000 households have become first-time buyers using the scheme since it began in 2013.

Given the ratio of average house price in England is eight times average earnings, this means many households still cannot buy.

The Help-to-Buy equity loan allows a household to put down a 5 per cent deposit on a new-build home and take out a government loan for a further 20 per cent.

As the equity loan is interest-free for the first five years, households can often afford significantly more with the scheme’s assistance. As with low deposit mortgages, this scheme is especially helpful for those households that cannot put down a substantial deposit on their own.

However, things are going to change.

We learned from the National Audit Office in June that 31 per cent of the households using Help-to-Buy could have afforded to buy without support.

Little wonder, perhaps, that the government plans to end the Help-to-Buy scheme in March 2023.

What about the housing crisis?

While today’s first-time buyers can borrow at record low mortgage rates and can take advantage of the Help-to-Buy scheme, there are many more households which still cannot access home ownership.

While it is possible to get a mortgage with a low deposit, banks are limited in how much they can lend households relative to their incomes.

No more than 15 per cent of a lender’s mortgages can be on loans over 4.5 times the borrower’s income.

Given the ratio of average house price in England is eight times average earnings, this means many households still cannot buy.

What happens next?

The broad consensus among economists is that the Bank of England will raise interest rates over the next five years.

This means we can expect to see higher mortgage borrowing costs, even if the rate rises are delayed by further Brexit uncertainty and are modest when they finally kick in. Add to that the end of the Help-to-Buy scheme, and things start to look less rosy for first-time buyers.

Shared ownership, a scheme which lets households buy between 25 per cent and 75 per cent of a home with a mortgage and pay rent on the rest, may be part of the solution.

Because these households are only buying a share, they do not need to raise such a high deposit or borrow as much with a mortgage.

And because they are paying a rent on part of the home, they are partly protected should mortgage rates rise.

Key Points

• It is first-time buyers who have benefited most from a resurgence in mortgage lending at high loan, low deposit ratios.
• Thirty-one per cent of the households using Help-to-Buy could have afforded to buy without support.
• First-time buyer numbers are almost back at their pre-financial crisis peak.

Given the same initial deposit, the monthly cost of owning 50 per cent of a home through shared ownership is roughly equivalent to buying the same home with Help-to-Buy for the first 15 years of ownership. It is substantially cheaper than buying without support.

Around 10,000 households bought a shared ownership home each year between 2015-16 and 2017-18.

If all the households using Help-to-Buy who genuinely could not afford to buy a home without help used shared ownership instead, this would increase demand for the scheme to 25,000 a year, an increase of 150 per cent.

First-time buyer numbers have doubled in the past decade and are almost back at their pre-financial crisis peak.

However, with interest rates set to rise and the death of Help-to-Buy on the horizon, the future looks less certain.

Shared ownership will help some buyers get half a foot on the housing ladder, but without further intervention we can expect to see first-time buyer numbers fall, and rising demand for good, secure homes for private rent.

Lawrence Bowles is a residential research analyst at Savills