Despite the predictions of doom mongers, the property market has enjoyed a fantastic first half of 2006. It’s a trend that has been recognised by the Council of Mortgage Lenders which increased its forecast for gross lending this year from 285bn to 310bn.
But while the housing market continues its strong run into the summer, concerns remain about whether this momentum is sustainable – not least because first-time buyer loans are at such a low level.
This raises the question about who or what is behind the current wave of house price inflation.
Some pundits suggest the vacuum left by first-time buyers is being filled with buy-to-let investors. They say that while first-time buyers struggle to deal with issues such as clearing student debt and saving for deposits, investors are simply dipping into the equity they gained from previous property transactions to extend their investment portfolios.
It’s almost as if there is a joust taking place with first-time buyers posing as medieval knights at one end and buy-to-let investors at the other, the winning trophy being the property that is on the market.
In this scenario, investors emerge as the victorious party – something that has helped to boost the market and keep it ticking along at a fast pace.
As well as investors, there are concerns about people buying second homes, particularly in rural and coastal areas. The effect these buyers have on first-time buyers was highlighted earlier this year in a report published by the Affordable Rural Housing Commission.
Elinor Goodman, chairwoman of the Commission, says if no action is taken the next generation will be priced out of the countryside. But developers are responding to this trend by launching shared ownership schemes designed to provide affordable homes for local people.
A Mortgages Direct survey reveals that first-time buyer loans plummeted in April with only 23% of all mortgages being taken out by first-time buyers compared with 47% in March. Meanwhile, the number of buy-to-let mortgages taken out rose from 9% in March to 19% in April as investors took advantage of house price inflation.
Peter Gladdy, director of Mortgages Direct, says the fall in first-time buyer numbers can be partly attributed to the lack of affordable properties available as prices continue to rise.
“At the same time, the number of buy-to-let mortgages has surged,” he says. “Investors are able to cash in on the high demand for rental property as first-time buyers struggle to get on the housing ladder.”
But can the blame be laid at the door of buy-to-let investors? Some suggest that this argument is too simplistic and that first-timers are far from being priced out of the market by investors. They say the real reasons why first-time buyer levels have fallen have more to do with wider behavioural and lifestyle changes. These include people wanting the flexibility that accompanies renting rather than buying.
John Heron, managing director of Paragon Mortgages, does not believe landlords are responsible for forcing first-time buyers out of the market.
“The easy story to write is that first-time buyer levels are weak and that they are being squeezed out of the market, essentially by affordability constraints,” he says.
He agrees that affordability has had an impact on first-time buyers but argues that this is not the whole story.
“There is a one dimensional way of looking at the first-time buyer issue and this is a problem,” he says. “You are missing the point if you only look at affordability and this can lead to ineffective housing policies.”
The CML says there has been a marked change in home ownership aspirations, particular among the under-25s. The proportion of those hoping to buy a home has fallen in 20 years from 80% to 50%.
Much of this is a reflection of the affordability problems faced by young potential first-time buyers and probably reflects a realistic assessment of their prospects of becoming first-time buyers within the next two years, says Bernard Clarke, spokesman for the CML.
“But that does not necessarily mean that in the longer term they do not aspire to be home owners,” he adds.
At the same time, renting is becoming a more acceptable option, particularly for the increasing number of students leaving higher education with huge debts and a more positive attitude to renting. For them, the idea of flexible accommodation is likely to appeal as it is something they have been used to dealing with.
Another reason people may decide to rent rather than buy is being able to live somewhere they want to rather than being forced to consider cheaper areas.
There is also the issue of immigration to consider. Immigrants represent another slice of potential first-time buyers who need flexible solutions to meet their living requirements.
Mark Alexander, managing director of The Money Centre, says the past 12 months have seen 400,000 people migrating to the UK from central Europe and this has had a massive impact on the buy-to-let market.
“This isn’t just in London, it is right across the country,” he says.
Alexander agrees that buy-to-let landlords are filling the gap left by falling first-time buyers but says buy-to-let is growing across all sectors.
“Concerns about the growth of buy-to-let tend to focus on the first-time buyer end of the market but the other end of the market should not be ignored,” says Alexander.
He points out that an increasing number of elderly people do not have enough income to fund their retirement. Some find the funds they need by selling their homes to landlords, then renting them back.
Taken together, these issues show a change in attitude towards home ownership and renting in this country. Perhaps we are adopting a more European outlook whereby people choose to rent rather than being forced to because they can’t afford to buy.
“It’s more socially acceptable to rent nowadays, regardless of whether people are in their teens or in their 70s, looking to raise cash to help fund their retirement,” says Alexander.
“There has been a marked shift in attitude towards renting in the past 10 years. But the whole market is expanding. This is not just the effect of a lost generation of first-time buyers.”
Heron agrees that the gap created by falling numbers of first-time buyers has been partly filled by buy-to-let investors. But he adds that the situation is “something of a see-saw”.
“If there is an uplift in demand for rented property, there is a private landlord industry ready and willing to meet that demand,” he says.
“But if there is low demand from tenants, landlords would not be in a position to rent out properties because they need the tenants. These things are connected.”
Many commentators believe the level of buy-to-let activity relative to first-time buyer activity is inadequate to support the theory that buy-to-let activity is fuelling house price inflation. They argue that the rise in house prices is created by a much broader range of factors including the levels of first-time buyers, second-time buyers and the shortage of housing.
But buy-to-let is an increasingly mainstream product and this trend seems set to continue. There’s a marked difference in the types of product being taken out. For example, fewer entrants into the sector means most buy-to-let business is focussed on remortgages.
At a recent buy-to-let round table hosted by Mortgage Strategy, Ray Boulger, senior technical manager of John Charcol, told attendees the broker used to see a 50/50 split but things have changed.
“We’ve noticed a shift to 67/33 in favour of remortgaging,” he says. “The reason for this is there is a lot of portfolio remortgaging going on. People want to pay better interest rates and gear up to provide deposits for more properties.”
John Malone, managing director of Premier Mortgage Service, believes fewer new landlords will enter the market as capital appreciation on buy-to-let properties will be lower than was previously the case.
“Most places are experiencing over-inflated prices and we are seeing more and more remortgage business,” he says.
If buy-to-let is on the rise, what are the implications for the future of the housing market? In particular will it be first-time sellers rather than first-time buyers who will be most affected as buy-to-let investors hold on to their investments rather than selling up after two or three years to trade up in the way first-time buyers traditionally do?
One of the main issues facing first-time sellers is the increasing cost of running a home. It is a problem that has featured in newspaper headlines in recent months. These have highlighted mounting costs, in particular rises in Council Tax and energy bills.
“The average employee is finding the cost of living high,” says Malone. “And once they move from being a first-time seller to a second-time buyer I imagine virtually everyone is now caught by Stamp Duty and other costs of moving.”
These extra costs will be particularly evident in parts of the country that are close to desirable amenities such as good schools and transport links. Whether they are two-bedroom semis or big terraced houses, properties in these locations are likely to be at a premium due to their location and buyers will be drawn into the costs associated with that property.
“I’m not saying the mortgage industry has a problem but some things are beginning to take a toll,” adds Malone. “We are seeing more unemployment, more properties being repossessed and more people being registered for defaults. These things added together could affect the market.”
With home owners able to stretch their borrowing limits above traditional income multiples with today’s affordability models, Malone warns of the dangers of clients borrowing more than they can afford to pay back.
“Years ago, a lot of people borrowed way above their income status,” he says. “It’s all very well bringing in affordability, but people are now borrowing more and they also have to pay higher bills. It is going to take them a long time to pay that money back.”
Peter Charles, head of strategy and planning at Mortgage Express, also believes home owners must act with caution – particularly potential first-time buyers facing increasing pressure to get on the housing ladder.
“I always thought that in the 1980s first-time buyers were forced to purchase too early,” he says. “Buying a property early in life is not necessarily a good thing if you are uncertain about your future financial needs.”
First-time buyers are increasingly dependent on financial support from their friends and family to fund their house purchases – in particular their parents. This has led to a host of mortgage products being introduced that take into account the ability of parents to act as guarantors.
This is good news for those looking to get onto the property ladder but such dependency adds to the volatility within the first-time buyer sector, acc-ording to Laurence Sanders, economist at Bristol & West.
“The rise in house prices has been greater than expected, and we were one of the more bullish forecasters on the housing market,” he says.
“We believe there has been a temporary upsurge and expect the annual house price inflation rate to fall back a bit in the next few months.”
With first-time buyers already stretched, any further increase in house prices will have a significant impact on their ability to get into the housing market. By contrast, the buy-to-let market tends to be more sensitive to movements in interest rates.
“It is a tough time for first-time buyers but that sector of the market will hold up due to funds given by parents,” says Sanders.
It is for this reason that first-time buyers might be in a better position than is widely believed. It is undoubtedly a significant factor in helping them to get onto the property ladder.
Today’s housing market is influenced by a host of complex forces and saying buy-to-let investors have pushed first-time buyers out of the market is too simplistic.
A range of causes need to be considered and top of the list is the lack of housing supply in this country. One solution to this problem is for the government to earmark more land for residential development and work with the industry to provide more housing.
Until that happens, buy-to-let investors look likely to carry the can for the problems being suffered by first-time buyers.
Home ownership is an aspiration, not a right
Bob Sturges is director of communications at Money Partners Analysis of recent first-time buyer activity has produced an ambiguous picture with some lenders expressing cautious optimism and others continuing pessimism. But it is clear that first-time buyers continue to be notable by their absence and are no longer the driving force in the housing market they once were. Why is this?
The causes of their effective exclusion can be traced back to the profound changes in the housing market that followed the recession of the early 1990s. The subsequent robust economic recovery produced a long period of property price inflation that saw house price growth outstrip earnings growth. This pushed affordable housing out of the reach of many first-time buyers across a broad swathe of the country, and its effect continues to be felt to this day.
Among the social and demographic factors working against first-time buyers is the pressure exerted on housing supply by the demand for single owner-occupied dwellings. This problem is exacerbated by the preference of developers to build larger properties that yield more profit. The effect has been to force up the prices of typical first-time buyer properties.
And lifestyle and attitude changes among the once-typical first-time buyer age group – 18 to 30 year olds – mean that many now choose to rent rather than buy. This may be because they recognise they have little choice but is also down to a growing preference for flexibility in work, travel and living arrangements.
An additional problem for potential first-time buyers is raising deposits and paying the costs associated with home buying. Mortgages of 100% LTV are in relatively short supply but even if they were not their suitability for first-timers is open to question. More worryingly, there is scant evidence that potential first-time buyers are choosing to improve their savings position.
The upward pressure on prices has been reinforced by the continuing popularity of buy-to-let. The effect of a combination of volatility in equity markets, rising house prices, sustained tenant demand and high City bonuses is only likely to strengthen this upward trend and further reduce the supply of suitable first-time buyer properties.
On the flip side, potential first-timers have been offered some hope by product innovations such as affordability calculators and deferred interest schemes. But a note of caution needs to be sounded here as these have yet to be tested in a recession. The government has chipped in with its HomeBuy scheme, although commentators are pretty much united in thinking this will make little difference.
Conditions are not right for the return of first-time buyers in significant numbers. Their place in helping drive the market has now been taken by other influencing forces such as buy-to-let and it is difficult to see how or when the gap between prices, earnings and savings will close sufficiently to change this situation.
The more realistic scenario is that the average age of first-time buyers will creep upwards as would-be buyers use the extra time to improve their financial position and credibility. This is no bad thing as home ownership should be an aspiration and not a right.
Potential FTBs put off buying until later in life
Mehrdad Yousefi is head of intermediary mortgages at Alliance & Leicester
First-time buyers are a key part of the housing market but they seem to be in short supply. To know first-time buyers is to understand them and as they are such a diverse bunch, it is only when we understand their characteristics that we can gain an insight into how they will influence the the housing market in the future.
There are several reasons why the number of first-time buyers has fallen in the past few years. The most significant development regarding the reduction of activity in this sector is affordability. By far the biggest obstacle for would-be first-time buyers has been raising deposits of sufficient size. There are still significant numbers of first-time buyers in the market providing larger than average deposits but the vast majority of young people either do not earn enough or do not have the desire to sacrifice their current lifestyles to save for deposits. Indeed, with house price growth far outstripping average income growth in recent years, even saving for a 5% deposit has become prohibitively expensive for many.
Credit constraints have also affected young people’s desire to get onto the property ladder. Home ownership rates among young adults fell sharply in the 1990s reversing the trend towards early entry into the market. This was associated with a tightening of credit constraints. It is also likely that this was caused by a shift in their income distribution towards additional commitments such as student debt.
While young people have a significant affect on transaction activity in the housing market by helping complete property chains, few academic or practical investigations have been undertaken to examine the causes of falling home ownership in this sector.
It is too simplistic to argue that the increase in buy-to-let lending is responsible for the drop in first-time activity although there is evidence to show that landlords have capitalised on the availability of traditional first-time buyer properties.
More realistically, the cause is likely to be the desire of young people to purchase their first homes later in life for lifestyle reasons. Many young people say they want to wait until they are in long-term relationships before embarking on home ownership and in the meantime enjoy spending their disposable income on social activities.
But the news is not all bad. First-time buyers accounted for more than a third (38%) of new mortgages between January and March, according to the CML, and their appetite is growing. And recent research from Alliance & Leicester shows that the proportion of under-30s planning to get on the housing ladder has risen by a third since January – up from 12% to 16%. With first-time buyers making a comeback, brokers are well placed to lend their support.
Making investors carry the can is not fair
Clare Mortimer is senior press officer at BM Solutions
House prices are continuing to rise and the reason for this is demand. So houses are still being bought and sold but the complicated question to ask is – where is the demand coming from?
First-time buyers have an effect on demand and research shows they are at an all-time low in the market. Why? This is an interesting question but I don’t believe there is a straightforward response that covers all potential first-time buyer positions.
Social change has had an effect. The stages of life are changing – couples no longer meet young, settle down quickly, buy houses and have children in the expected timescales. The days of having to be married with a family by the age of 25 are gone. People now find partners, marry and start families as and when it suits them. These are consumers who choose to rent rather than buy, enjoying the freedom this can bring. These days, young professionals might start their careers in one city with no intention of buying houses and living there in the longer term.
I’m not so naive as to think this is the only reason for the fall in first-time buyer numbers, and much attention has been paid to the fact first-time buyers can no longer afford to buy houses. Issues such as Stamp Duty have been widely cited as severely limiting first-time buyers’ ability to buy.
It is hard for first-time buyers to get on the property ladder, but has it ever been easy? Recent research suggests it takes four years to save for a deposit – is this longer than it would have taken a young couple 20 years ago? Is the ‘buy now pay later’ culture making first-time buyers believe they should be able to get straight onto the housing ladder without saving first?
When it comes to saying buy-to-let investors are responsible for boosting property prices, the formula is as simplistic as saying if there is demand for rental properties investors will continue to buy to meet that requirement. Making investors bear the brunt of arguments that suggest they are keeping first-time buyers out of the market is not fair. Nowadays, buy-to-let is something more people feel they can dabble in and the numbers of investors are increasing.
Advice is vital in all areas of the housing market. For first-time buyers to understand what they can afford and how much they need to save they should seek expert advice from brokers. This would alleviate the widespread feeling potential first-time buyers have that there is no hope. Lenders and brokers want to encourage first-time buyers and so will do as much as they can to support them.
Housing is a dynamic sector moulded by the economy and the people of this country. Having a nice house means a lot to most people and many move up the ladder as quickly as they can. This continued upward movement is one reason for continued house price inflation.