Will the chancellor’s promised investment in new homes bring the first rung of the housing ladder within reach for FTBs?
The struggles of first-time buyers are well known and, seemingly, enduring. The latest projections for the potential class of 2017 straining for a foothold on that precious first rung are pessimistic.
That outlook has been brought into focus by the imminent closure of the Help to Buy mortgage guarantee scheme – that encourages lenders to offer high loan-to-value mortgages via a state-backed insurance scheme – which is scheduled for the end of this month.
On top of soaring house-price-to-earnings ratios and what some call a ‘chronic shortage’ of afford-able housing, it makes depressing reading for many 20- and 30-somethings who dream of owning a home.
That said, there are signs that the first rung of the housing ladder is coming within reach of more borrowers. Latest data from the Council of Mortgage Lenders shows a rise in lending to this group, albeit from a relatively low base.
Interest rates are at record lows and the availability of high-LTV mortgages is at an eight-year high – although, if a property price is simply unaffordable, these facts are irrelevant.
“The average UK home is now six times the cost of the average wage, and this gap shows no signs of shrinking,” warns Legal & General Mortgage Club director Jeremy Duncombe.
“A supply-side crisis defines the housing market. For many first-time buyers, the dream of taking that first step is moving further out of reach.
“The market cannot continue like this. We need an innovative housebuilding initiative to provide respite to this worsening crisis. Until we see some real action, our housing market will remain exclusive.”
Like Duncombe, many deem the lack of supply the chief barrier to affordable prices. But haven’t we heard all this before?
Chancellor Philip Hammond announced in the Autumn Statement his intention to invest £1.4bn to enable the delivery of 40,000 extra affordable homes. He also revealed there was to be a housing white paper to address long-term building challenges.
But Hammond is not the first government minister in recent years to pledge to build more homes. Among many examples, planning permission was granted for 216,000 new homes in England in 2013/14.
The latest announcement did not excite commentators as much as the chancellor may have hoped.
“Any commitment to boost supply is a welcome step but we need far more homes than were announced to even begin to address supply,” insists Mortgage Advice Bureau chief executive Peter Brodnicki.
The consensus among many experts is that the UK needs 250,000 new homes a year to keep up with demand. However, government statistics for 2015/16 show that construction was begun on only 172,080 homes – a rise of a mere 200 from the previous year’s total, which itself was up by less than 10,000 from the year before.
Housebuilding totals have generally risen since 2008/09 but are far below the figure of 234,280 in 2005/06. In fact, the UK has not hit the ‘magic’ mark of 250,000 new homes since 1988/89.
Naturally, the lack of supply fuels increases in house prices. The Halifax House Price Index for October showed a 5.2 per cent annual jump, a 0.1 per cent quarterly increase and a 1.4 per cent monthly rise – with the average price at £217,411.
Although the statistics reveal a slowing of price growth in the aftermath of June’s Brexit vote, nevertheless they are up from what many had already thought were unaffordable levels for swathes of the population.
Perhaps the clearest demonstration of the challenge for first-time buyers comes from a comparison of house prices and average wages. In a report last month, property analyst firm Hometrack said in London the ratio of prices to earnings had reached 14 to 1 – more than double that for the entire UK, at 6.5 to 1. It said London house prices had risen by 86 per cent since 2009.
Using old-fashioned income multiples as a benchmark, these ratios far outstrip the three- to five-times income stipulated by most lenders, although lending decisions are far more sophisticated these days. That said, there are signs of hope in some areas; the average ratio in Glasgow, Liverpool and Newcastle is below 5 per cent.
At first glance, the ending of the Help to Buy guarantee scheme could make matters worse for first-time buyers. However, few experts spoken to by Mortgage Strategy seemed worried by the closure, largely because they thought the scheme had done its job in reigniting lender interest in high-LTV home loans.
The guarantee encouraged lenders to offer more mortgages to people with only small deposits. In the event of a borrower default, losses were insured for up to 15 per cent of a property’s value for homes worth up to £600,000.
Trinity Financial product and communications director Aaron Strutt says: “Lots of the lenders offering 5 per cent and 10 per cent deposit mortgages do not seem worried that these rates will disappear after the guarantee scheme finishes.”
London & Country communications director David Hollingworth adds: “There is now a healthy number of lenders offering high-LTV rates as part of their core range and many do not use the Help to Buy guarantee.”
He says some lenders that previously relied on the scheme to enable their provision of high-LTV mortgages now offer those products without it.
“Some have already made the shift away, for example, Santander,” explains Hollingworth. “That suggests there is little chance of a contraction in availability.”
Data firm Moneyfacts says the Help to Buy guarantee scheme “made it acceptable to lend at higher LTVs again after the financial crisis”.
Moneyfacts statistics highlight the increase in availability of high-LTV mortgages. The number of 90 per cent LTV products is at its highest since 2008, with 594 on offer in November. This is a slight increase from 569 in November 2015.
The increase would have been greater had the total not fallen between March and August, which in early autumn led some to fear that the high-LTV market was about to implode.
Mortgage insurer AmTrust International’s commercial director, Simon Crone, told Mortgage Strategy in September that lenders appeared “more risk averse since the Brexit vote”.
The recovery in high-LTV products has allayed experts’ fears and Crone now says that, “as a minimum, we hope levels of high-LTV lending will be maintained next year”, partly because he expects lenders that had used the Help to Buy guarantee scheme to “transition to private-sector insurance”.
Lenders agree that the market is unlikely to be jolted by the demise of the guarantee scheme.
CML spokesman Bernard Clarke says: “It has encouraged the return of higher-LTV lending, largely outside London and predominantly to first-time buyers.
“After 2008, the number of first-time buyer mortgages above 90 per cent LTV collapsed so that, before the introduction of the guarantee, they accounted for only about 5 per cent of the total. Within a short period, the proportion had bounced back to more than 20 per cent, almost entirely as a result of the scheme.
“Unlike other interventions, it has delivered volume, with more than 80,000 mortgages advanced. It filled a gap while confidence returned to the market, and lenders are now offering many more 90 per cent LTV mortgages outside the scheme. After it’s gone, we expect little disruption.”
There are other glimmers too for first-time buyers, such as attractive rates on these deals.
Hollingworth points to best-buy two-year fixes at about 3.3 per cent at 95 per cent LTV, which only a year ago would have been half a percentage point higher. “The choice is good and, as competition has improved, so have rates,” he adds.
However, he also points out: “The step-up is still significant, especially from 90 per cent LTV to 95 per cent. Two-year fixes can be below 2 per cent for those with 10 per cent to put down, so a bigger deposit can make a big difference.”
Hollingworth warns that higher swap rates may put pressure on these deals, which could make costs rise for first-time buyers.
For now, rates are low, although those on high-LTV mortgages have not fallen as far as those on lower-LTV deals.
Analysis by Moneyfacts and AmTrust shows that the average cost of a 95 per cent LTV loan fell by 0.05 percentage points in the three months to mid-November, compared to a fall of 0.15 percentage points on 75 per cent LTV deals.
Rise in lending
Undoubtedly, the greater availability of high-LTV mortgages at lower interest rates helps to explain the rise in lending to first-time buyers.
According to CML figures, in the first nine months of this year 248,400 first-time buyer mortgages were arranged, compared to 225,300 in the same period last year – a 10 per cent rise. Therefore 2016 may prove to be a better year overall for first-time buyers.
For the full year of 2015, 312,900 home loans were advanced to this group, up slightly from 309,400 in 2014. There has been a steady rise since the financial crisis in 2008, yet the number is still far below the total for 2006, when there were 402,800 first-time buyer mortgages. In 2001, meanwhile, the figure was 568,200.
So what can we expect in 2017? There are signs of green shoots in the recent lending figures, while the Lifetime Isa that will launch next year is another scheme that could help first-time buyers to secure a deposit. In the meantime, the Help to Buy equity loan scheme will continue.
Nevertheless, sky-high house prices mean first-time buyers will continue to face huge challenges. Although Halifax predicts a further easing in average price growth, it expects levels to remain unaffordable for many.
Inflation is expected to rise next year and the Institute for Fiscal Studies says, even by 2021, wages will not have recovered in real terms to 2008 levels. This will put pressure on household budgets, and the house-price-to-earnings ratio could increase.
The picture is not one of utter despair. Hundreds of thousands of wannabe first-time buyers will reach their goal next year, as a result of either a well-paid job, a wealthy and generous family, purchasing in a cheaper area or having other sources from which to generate equity.
Nevertheless, there is a nagging feeling that, after next year’s first Autumn Budget, we could still be asking the same question: is this the year when, as a group, first-time buyers finally feel able to achieve their dream?