For most people, 1992 is probably still best remembered as the year interest rates touched 15%, rapidly followed by the UK’s exit from the Exchange Rate Mechanism on Black Wednesday. In many ways, the political and economic fallout of those events overshadowed a significant tremor in that year’s housing market – the fall in the number of first-time buyers to its lowest level since records began.The late 1990s saw a sustained increase in the number of first-time buyers but that trend appears to have gone into reverse and the present picture reveals some similarity to the situation pertaining between 1989 and 1992. Historically, the first-time buyer has been pivotal in ensuring the efficient operation of the housing market by providing liquidity at the lower end, allowing others to trade up. What are the reasons underlying this decline? Affordability is, of course, a problem. The average price of a first-time buyer property increased from around 20,000 in 1984 to 117,000 in 2004 – a rise of more than 480%. This compares with an increase in the average first-time buyer’s income of 224% over the same period, driving up the average income multiple from two to three. A related cause is the housing shortage identified in Kate Barker’s seminal study, Review of Housing Supply, in March 2004. Barker found the aspiration for home ownership remains strong but is hindered by the shortage of affordable housing and planned construction. And according to the latest census in 2001, inward migration accounts for a further 80,000 households each year. In an effort to illuminate the recent drop in first-time buyer numbers, a considerable amount of research has been completed by the Council of Mortgage Lenders and GMAC-RFC this year which highlights the shifting demographics of the first-time buyer market. A key finding of the CML’s research is that the average age of the first-time buyer has increased from around 30 in the mid-1980s to 34 in 2004. This can be attributed partly to the fact that a smaller proportion of first-time buyers are under 25. People under 25 comprised 38% of first-time buyers in 1990 yet this figure was down to just 18% by 2003 even though the number of households aged under 25 has grown since 2000. In uncovering other reasons for the evident decline in first-time buyers it is plausible to analyse changes in the lifestyle and attitude of the typical first-timer over the past 10 years. For starters, young people are saving less and spending more on the latest consumables, resulting in soaring unsecured debt. The expansion in further education provision also means many more young people are going to university with an associated delay in their entry into the employment and the housing market, sadly with an increasing level of student debt. There is also the perception among young people that a commitment to a mortgage constitutes a constraint on personal independence and a sign of settling down to the treadmill of adult responsibility. Perhaps more significant has been the availability of quality rental accommodation in fashionable areas, enabling young people to live the lifestyles they want while maintaining the flexibility of moving according to employment opportunities. This latter factor is supported by the sustained growth in the buy-to-let market. Buy-to-let investors have taken the place of first-time buyers to some extent at the lower end of the market, providing the liquidity necessary to allow others to trade up. The importance of this sector has been recognised by mainstream lenders such as The Derbyshire and West Bromwich which have significantly broadened their offerings to take a greater share of the market. Research by Paragon Mortgages backs this up, saying 74% of people aged 18 to 24 choose to rent their first property in contrast to 55% 20 years ago. The marked decline in the number of first-time buyers has come to the attention of the government which has launched initiatives with some success, notably Right to Buy, shared ownership and Homebuy. But the most recent consultation paper on shared equity whereby the government and the lender each provide an equity loan of 12.5% and the borrower secures a mortgage for the remaining 75% has received a lukewarm reception from lenders and intermediaries. While there is widespread agreement with the principle, many commentators regard the requirements as impractical, as exemplified by Abbey’s withdrawal from the working group. It is anticipated the proposals on shared equity will have a minimal impact given that demand continues to rise faster than the increase in housing stock. Lenders are also continuing to tackle the first-time buyer decline through product and policy innovation. The landscape for first-timers is uneven but the overall outlook is encouraging, contrary to the intimations of some observers. Many lenders have made excellent innovations in products, policy and criteria to address the affordability issue. The government has also shown imagination, with several initiatives – especially shared ownership – attracting the support of a number of lenders. Furthermore, the growth of the buy-to-let sector, supported by improvements in lenders’ flexibility, has not only enabled individuals to live the versatile lifestyles they enjoy by renting but also generated liquidity. It’s more than a decade since 1992 and there are apparent similarities but appearances are deceptive. With concern for the plight of first-time buyers matched by real efforts on the part of lenders and government to rise to the challenge, what the market needs now is confidence. Confidence that house prices will not drop significantly and confidence that interest rates will not increase significantly. It is vital lenders engage with the government and support initiatives in addition to reviewing their policies and criteria.
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