Is there any hope for first time buyers?
This evening Oliver Hudson gets to the nub of the first time buyer dilemma in an interview with Kate Sweeting from BBC Look North. The piece also includes an interview with a first time buyer, Jessica, who is looking for a property to buy with her partner Graham, and she talks about the challenges facing first time buyers.
They are in a fortunate position in that they both have full time, professional jobs and Jessica, who was brought up by her parents to save and not to spend what she didn't have, has been saving up for a house since she left university about 7 years ago. As they live and work locally, they have both been able to live at home with their parents, which has really helped them to save up. Now, both aged 28, they are ready to take the first step.
But how many people are in that position? Not many I suspect. Over the past 10 to 15 years we have become a nation of borrowers, in an increasingly commercial world, with most people wanting the growing number of luxury items on offer to us, often using credit which has made them too accessible perhaps - mobile phones, computers, cars, holidays, branded clothes, and so on. The result is that the average person is in debt, never mind having any 'savings' to speak of. Without a deposit of say 15% of the property value, it is very difficult to get a mortgage without being hit with high interest rates and huge mortgage arrangement fees. In general, the first time buyers who are actually buying at the moment are either like Jessica, who has been saving up for years, or they are being helped to find the deposit by a family member.
What can be done?
Well, the Government are desperately trying to find ways to kick-start the property market in order to achieve economic growth, but to be fair it is not easy.
Earlier this year they introduced a New Build scheme to help buyers, with half of the deposit being provided by the government and the mortgage lender, to reduce the deposit that a buyer needs to put down. Whilst this can be effective, its value is limited as it only applies to new houses, and it is well known that new properties are more expensive, so there is already an added premium which buyers wouldn't be paying on older houses.
The Government has also just introduced the Funding for Lending Scheme, which was designed to boost lending to both households and businesses. It works by allowing banks and building societies to borrow money from the Bank of England to help them to lend more. In relation to property buyers, banks have been given strong incentives to boost lending, by lowering interest rates and increasing the availability of mortgages. The more that they lend, the more they can borrow from the Bank of England. Banks that are increasing their lending will pay the lowest fee on their borrowing while those that reduce their lending they will pay a higher fee. To put it simply, banks borrow money from the Bank of England with attractive terms, in return for giving out more and cheaper mortgages to buyers, to encourage more spending, and thereby achieve economical growth.
Is it working? Actually, it does appear to be. Of the UK’s six biggest banks, all except HSBC, who say they do not need additional funding, have signed up for the scheme, so there is a feeling of confidence that mortgage availability is about to improve. Mortgage enquiries in the Hull and Humber region have shot up in recent weeks, and there appear to be more mortgages available and more lending capacity, which is why the results of a survey released by the Royal Institute of Chartered Surveyors earlier this week indicated that their members are feeling much more confident about the property market over the next few months.
But is that helping first time buyers? No. You would think so, but it doesn't change the fact that they have to find a deposit, and they have no existing property with equity to use. As a result, it is still extremely difficult for mortgage advisers to help first time buyers to get on the property ladder. Either they don't meet the lending criteria, or the interest rates and charges are astronomical and risky.
What else is being done?
Last week Ed Balls, the Shadow Chancellor, said it was time to stop messing around and to do something about the property market, and he came up with a two-step proposal aimed at kick-starting the housing market. He suggests selling the 4G network to fund his plan. Great. His first step is to build 100,000 new affordable homes. Great. But his second step is completely flawed for many parts of the country.
He proposed a 2-year stamp duty holiday for first time buyers. Stamp duty on purchases between £125,000 and £250,000 is subject to 1% stamp duty, so at most it will cost £2,500. But in many parts of the country, first time buyer purchases come under the £125,000 anyway. So, in Hull for example, such a scheme will benefit a very small number of buyers. In other words, the very few first time buyers who can afford to buy a property for more than £125,000 and ironically, the ones less likely to actually need assistance.
And so, whilst the current Government's schemes certainly appear to be stimulating the property market in some ways, there remains the dilemma of how significant numbers of first time buyers can actually buy their first property. If they can't, they will either stay at home or will eventually move into rented, if indeed they can afford the growing rental prices. Long term, I suspect renting will become more common, a larger proportion of property owners will be landlords, and rental prices will even out as the supply of rental accommodation increases. If this does happen, we could finally start to see a change to the ratio between owner-occupied properties to tenant-occupied properties, following a model that is more common in other parts of Europe.
11th October 2012
Oliver Hudson Managing Director Hudson Property