Housing storm looming as first-time buyers remain underserved

Average house price in 2021 was £264,000 and the average first-time buyer deposit was £54,000. Meanwhile prices in some parts of the UK outstrip average salary by 6.9 times, and in other areas, notably London, it is in the low 10s. 

Given how house prices have continued to rise in 2022, that ratio is likely to have grown.

But if people in a group that accounts for half the home purchase loans are increasingly unable to get on the property ladder, this could spell disaster for the housing market.

And the situation could be made worse, with a continued lack of supply, over-priced properties relative to a first-time buyer income and a tightening of criteria by lenders as we head into a hurricane of falling incomes and rising costs, warns Martin Stewart, director and founder of London Money.

So, is there a fix for the first-time buyers market?

Carl Shave, director at Just Mortgage Brokers, says addressing the problem may require a dramatic mindset shift.

Until as a society we stop seeing our homes as an investment, and rather as a place to live, house prices will continue to rise.Carl Shave, Just Mortgage Brokers

“Rising house prices in turn give the need for larger deposits and/or larger mortgages," he says. "Affordability can only stretch so far and lenders have a duty to lend money sensibly so there has to be a limit to maximum mortgage sizes.  

“Affordable house prices are key. However, until as a society we stop seeing our homes as an investment, and rather as a place to live, house prices will continue to rise as we seek the top value when looking to sell. Supply and demand together with commercial interests are also strong contributing factors."

Without the bank of mum and dad supporting first-time buyers, Stewart says the UK would be faced with the property equivalent of an “ecological disaster akin to all the bees disappearing”. 

He adds: “Chains do not normally start unless a first-time buyer is present and while their numbers have grown over the past 10 years, much of that has been down to government and family support. It has made for a synthetic first-time buyer market.”

Shave agrees. He says that while government-backed house purchase and mortgage schemes can assist first-time buyers purchase their home, they cannot offer the longer-term solutions that are needed.

“One of the knock-on effects will see the continued rise of lifetime mortgages or equity release where parents will be using their property value gains to fund the next generation of homeowners," Shave adds.

The scale of the problem is huge and tackling it will require a multi-layered approach as well as some new ideas.

Creating solutions

A group of mortgage brokers concerned by the problem have banded together to call on lenders, house-builders, MPs and regulators to collaborate to find new ways to help first-time buyers obtain mortgages.

In a new white paper called "Overcoming the challenges facing UK first-time buyers", the Industry Panel for Financial Advice has proposed a series of ideas:

1. Protect homes for first-time buyers by protecting and increasing the number of homes being built through the government’s affordable housing schemes and introduce new laws that limit the proportion of homes that can be ‘staircased’ up to 100 per cent ownership.

2. Launch industry-wide campaign to raise awareness of Help to Buy alternatives, including the promotion of privately backed shared equity schemes, which could build on the visibility and success of Help to Buy, and for those schemes to open their doors to buyers of homes other than new builds.

Specific first-time buyer homes need to be the focus, whether this be via shared ownership stock or future new build developments.Carl Shave, Just Mortgage Brokers

3. Create intergenerational mortgages by linking equity release or retirement interest-only loans with a first-time buyer mortgage. This could help those whose parents do not have the savings to gift them a deposit. The rebranding of joint borrower-sole proprietor loans could also be considered to increase their appeal and understanding among families and first-time buyers, combined with a push by mortgage advisers to raise awareness of such loans.

4. Consider new and innovative approaches to high loan-to-value lending, such as split-term mortgages, which would for example see a 9 per cent LTV loan offered over a 35-year term and the remaining 5 per cent offered as a secured or unsecured loan over a five-year term, meaning at the end of the first five years, the borrower would be able to remortgage onto a mainstream home loan.

5. Explore the idea of ‘low start’ mortgages, which could combine capital and interest-only borrowing to help tackle affordability barriers. Such borrowing could be made safer by lending over a 35-year mortgage term and reducing the portion on interest-only as the borrower’s earnings increase.

The paper follows confirmation of a planned government review of the mortgage market to help first time-buyers, who are finding it more difficult than ever to get onto the ladder due to a combination of the end of Help to Buy, rapidly rising house prices, the spiralling cost-of-living and economic uncertainty.

Changes to planning laws are not always popular on a local level.Gareth Lowman, SPF Private Clients

Shave says while many of the proposals by the IPFA are "worthy of consideration", it is more imperative to address the housing issues faced by first-time buyers rather than continue to find ways to fund the purchases that in turn will only add fuel to the fire.  

“Specific first-time buyer homes need to be the focus, whether this be via shared ownership stock or future new build developments,” he adds.

Stewart says that he welcomes new ideas, but sometimes the path of least resistance will always trump new ideas. 

“Building more stock, regulating buy-to-let, compulsory purchase of empty homes and improving the home-buying process will all be things that help to make the housing sector fairer, flatter and fit for purpose for the years ahead,” he adds.

Supply issues

Housing supply has been an issue for many, many years, and while changes to planning laws, including permitted development rights help, Gareth Lowman, group chief executive of SPF Private Clients, says there are still not enough properties being built.

He adds: “Ambitious targets have not been met and in 2020-21 net additional dwelling fell 11 per cent on the previous year. The 216,500 new dwellings resulted from 194,000 new builds and nearly 24,000 change of use between non-domestic and residential.  

“Changes to planning laws are not always popular on a local level. Further challenges for house-builders include skills and material shortages. This on top of new green agendas, for example nutrient neutrality, are going to add to the build costs and force prices up."

The Architect's Journal defines nutrient neutrality as the amount of nitrates entering the water system as a result of a new development being offset by the removal of an equivalent amount of nitrates.

Affordability

While announcing the government review, Boris Johnson also unveiled plans to extend the Right to Buy scheme to housing association tenants, but critics labelled the move as self-serving to detract from his party’s internal conflicts, while others said it does not tackle the root issue of funding for future social housing.

Additionally, affordability would also continue to play a major role in people being able to afford to buy the properties.

The Bank of England also recently announced plans to withdraw its affordability test recommendation from August 1, which brokers have said is unlikely to really shift the dial.

Introduced in 2014 the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage. 

Lenders want to lend but only on their own terms. No one wants to be top of the best buy tables anymore.Martin Stewart, London Money

The other recommendation, the loan to income limit, which will not be withdrawn, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.

While the BoE proposals will help some borrowers, without the need to take more expensive long-term products, brokers say it is unlikely to cause the mortgage-credit floodgates to burst open as the LTI remains and ultimately the decisions really lie with the risk managers of the lenders who remain cautious.

Shave says: “Where I see the scrapping of this rule helping the most will be where affordability restricted shorter terms on loans. As such it is likely to impact the older generation of borrowers rather than many of the first-time buyers where age and term is typically not an issue.”

Stewart adds: “Lenders want to lend but only on their own terms. No one wants to be top of the best buy tables anymore, they want to be bottom – that’s how quickly the market has moved in the last six months.

"So whether they do or don’t relax affordability rules at the BoE, it is the risk managers at the lenders that will dictate how much of that, if any, gets to make it to the High Street.

"The reality is that the housing market is like the inside mechanism of a fine watch. There are lots of cogs and wheels all doing what they are so supposed to do and they collectively all contribute to turning the hands on the clock face. When they all work, it's great, but it only takes one or two cogs to perform badly for the watch to start slowing down."

Ima Jackson-Obot is deputy features editor of FTAdviser