Being a first-time buyer in today’s property market is not as easy as it was 30 years ago, with millennials at age 30 being 50% less likely to own a home than baby boomers at the same age[1].  There are a range of issues that first-time buyers face and whilst government regulation has tried to address these, the problems are ultimately far greater than any legislation could change overnight.

Income Multiples

From the perspective of a mortgage adviser, the affordability for mortgages isn’t as bad as what individuals imagine it to be.  With a 95% Loan To Value (LTV), for £237,500 costing around £1,000 per month, which isn’t a complete stretch for First Time Buyers (FTB).  The issue here is the income multiples which lenders use to judge the amount of loan they will lend.  With average income multiples looking to be approximately 4.5 times annual gross salary, the amount the lender will lend to FTBs, who are generally on starting salaries, is not in line with affordability of these mortgages.  A FTB purchasing on their own would require an annual gross salary of £50,000 and relativity debt free in order to be lent £225,000.  Income multiples were set back 2014[2] in a bid to stop rising house prices. Despite this, since 2014 house prices have risen by 124% compared to an increase of 118% between 2005 and 2014, suggesting that this measure has not been effective[3].  Some would argue that this policy has only priced FTBs out of the market, as they do not have any equity to put as a deposit and generally will have low starting salaries.  A survey run by HSBC on millennials found that 2/3rds who didn’t own a home put it down to their salaries not being high enough[4].

A recent article by the Guardian puts this into perspective extremely well saying “Houses are also less affordable than ever before: in 1990 houses cost just under 3.5 times the average salary; today it’s more than five times the typical salary, rising to more than 10 times in London.”[5]

House Prices

What exaggerates this situation further is the fact that house prices in London and the surrounding areas are becoming astronomical.  The average flat price in October 2018 being £414,067[6], meaning with a 5% deposit, first time buyers are looking at annual gross salaries of £90,000 or £45,000 each for two buyers in order to be lent the amount of money required to purchase.  A report by the National Housing Federation Home Truths says that the average Londoner would need a salary increase of 282% in order to afford a house[7].

Further, a report by Thinktank shared in the Guardian on 17^th April 2018[8] suggested that half of the millennial generation will be renting until their 40s and 1/3 will never own their own home.  Another shocking fact is shown through a survey carried out for the Local Government Association by estate agents, found that just 20% of 25 year olds own their own property, down from 46% 20 years ago[9].  This isn’t for the fact that millennials don’t want to buy a property with 74% of millennial non-owners intending to buy in the next 5 years[10].  This demonstrates that FTB are being priced out the market with the vast, ever-growing housing prices.

Houses are not worth what they are put on the market for

The market is mainly increasing due to individuals believing their home is worth more than what it actually is.  Ultimately, a house is worth what someone is willing to pay for it.  However, when houses are priced well it should take about 3-10 days in order to find a buyer[11], whereas an overpriced house will take a lot longer, creating extreme inefficiency in the market.  Commonly, it takes approximately 2 to 3 months to sell a home in the UK[12] and on average are being sold for 96.7% of the asking price, with this decreasing further to 95.6% in the capital[13].  This illustrates how homes are being marketed for more than they are worth, which is causing huge efficiency problems and causing issues for the FTB.

Deposit

With almost half of all young people going onto higher education[14] and gaining the average of £44,000 debt that comes with this[15], most have little to no deposit to put forward to purchase for the first time.  This means that FTBs must typically save for ten years in order to save for a deposit in London[16] and this amount is set to hit £250,000 by 2027[17].  The extreme house prices mean that the deposits required are greater. This, accompanied with student debt and low starting salaries means the market is becoming extremely tough to move in to.

Positives

It’s not all doom and gloom, the number of FTB’s is at its highest point for 10 years[18] and house prices on average have fallen in London from October 2017 to October 2018 by 1.7%[19]. The Evening Standard even reports that Brexit could pull house prices down for the first time since 2009[20].  Further, the draw of not being within a chain and not having to suffer the inefficiency this causes is a huge pull for sellers.  In some cases, this means FTBs are able to purchase for up to 10% less than the asking price.  Moreover, the government have released a number of initiatives in order to help FTBs move onto the property market

Government Initiatives

Back in 2015 the government released the Help to Buy ISA in which FTBs could save money each month and receive a bonus on these contributions in order to help with a deposit.  This has since been replaced by the Lifetime ISA, in which FTBs can save up to £4,000 and receive a 25% bonus on top of these funds from the Government.  This policy has gone down extremely well with FTBs and many have done the wise thing and deciding to take one out.  There are some rules about how and when you are allowed to use the funds, so my advice would be to make sure you are fully aware before opening one, but open one sooner rather than later (even if it’s only with £1!).

Prior to this in 2013, the Help to Buy: Equity Loan was introduced in which the FTB would need a 5% deposit and the government would then loan 40% in London boroughs and 20% elsewhere interest free for 5 years.  This loan is only available on newbuild properties and the government benefit from any increase in the house price should the FTB decide to sell[21].  This initiative meant the FTB could have a greater deposit, therefore gaining greater purchasing power and better interest rate deals.  Phillip Hammond stated in the Autumn Budget of 2018 that this scheme will be extended to 2023[22].

There are also a few more schemes that have been introduced such as Shared Ownership, Right to Buy and Shared Equity Schemes all with the underlying motivation to help FTB’s move onto the property ladder.  The latest, announced in the 2017 Autumn Budget came in two parts, firstly removing Stamp Duty for the first £300,000 on properties worth under £500,000 and secondly by promising to build more homes in the right places by making £15.3 billion available over the next 5 years[23].  The first of these has come under large scrutiny with the OBR (Office for Budget Responsibility) saying straight after the announcement that the cut will push prices up[24] and has since been proven right by information released by the Mortgage Advice Bureau a month later[25].  However, this legislation has saved FTB’s up to £5,000 on Stamp Duty which ultimately is good thing.

Understanding of the Property & Mortgage Market

With all these issues faced, the greatest is definitely the FTB’s understanding of the property and mortgage market and how to get the best for their money.  The complexity and lack of education in this area means that a lot of FTB’s are looking towards Mortgage Advisers for guidance during this process.  As a Mortgage Adviser, I cannot solve the issue of astronomic house prices, the income multiples and sellers trying to sell their home for more than they are worth.  However, I am able to explain the different Government initiatives and the different types of mortgage products available and how each can work together to give the best solutions designed to each individual’s specific needs.  I am able to act as a point of contact, to guide you through this process and find you the best deal on the market for your unique needs.

If you would like me to help you, or someone you know, move onto the property ladder then do not hesitate to contact me on 07966 204 599 or via email at pe@bsgfs.co.uk and I will be more than willing to assist you.

I look forward to speaking to you.

 

Peter Edwards CII (MP)

Mortgage & Protection Adviser

Your home may be repossessed if you do not keep up repayments on your mortgage

An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested