First-time buyers (FTBs) have rolled with the punches dealt by the cost-of-living crisis over the past three years and they continue to buy homes.
In the face of “substantial hikes in mortgage rates”, the number of FTBs has remained “resilient” compared to home movers and landlords, according to Savills associate director of residential research Ed Hampson.
The property agent reported in April last year that FTB numbers were 30% below their 2017-19 average. But by April 2024 they had bounced back to just 11% below that average, maintaining their typical share of around 29% of the whole of the homebuying market. By comparison, home mover and buy-to-let purchases were both 24% below their 2017–19 average levels this April, according to Savills.
To keep up this level of homeownership, FTBs have had to tack against significant headwinds.
Most parents believe they’ll have to assist their children in some way to get on the ladder
The Bank of England (BoE) cut rates from a 16-year high in August, by 0.25 percentage points to 5%; its first cut in four years.
But before that the central bank had lifted interest rates 14 times in a row, between December 2021 and August 2023, taking the base rate from 0.1% to 5.25%.
The BoE acted to combat inflation, which had rocketed to a 40-year high of 11.1% in October 2022, sparked by supply chain backlogs leading to food and energy price rises in the aftermath of the pandemic, as well as war in Ukraine, and later unrest in the Middle East.
The annual rate of rising prices now stands at 2.2% after the central bank’s tightening.
However, the average house price lifted by 4.3% to £292,505 in the year to August, its highest in two years, according to the latest Halifax House Price Index.
An FTB looking to buy a typical first home — priced at £250,000 — with an average 20% deposit would require an annual household income of £60,600 to qualify for a home loan, up £2,400 on a year ago, according to June data from Zoopla.
I’m not sure if any FTB measures are actually required, but we need to have the Budget
This means that just over half (54%) of FTBs now need a loan of more than 4.5 times income to afford a home, says Lloyds Bank. This climbs to 80% of young buyers in London.
Generational wealth
SPF Private Clients chief executive Mark Harris says: “FTB numbers have remained remarkably strong given that average house prices continue to edge upwards, as well as the high cost of mortgages and living more generally, which makes it extremely difficult to save up for a deposit.”
Generational wealth underpins these numbers, as JLM Mortgage Network group director Sebastian Murphy observes.
“It’s very much the case that most parents believe they’ll have to assist their children in some way to get on the ladder. Rightly or wrongly, that’s simply the point we have got to.”
People are viewing homes but they are not making offers because they want to know what the Budget will entail
Younger property buyers also have to contend with the drumbeat of rising rents — which makes it harder to save but also pushes them into the property market.
Private UK rents lifted by 8.4% to £1,286 on average in the 12 months to August, according to the latest data from the Office for National Statistics. Although this is down from 8.6% in the 12 months to July, it is almost four times the current rate of inflation.
A tight residential market has led to younger buyers making compromises on the location, size and type of property they are willing to buy. Savills points to a survey of 200 of its clients last September, which found that FTBs had had “to forego their desired postcodes” over the past two years because rates had risen. Specifically, 45% of FTBs said market conditions had led to “significant” compromise on location.
Longer terms
Once FTBs have settled on a property, more of them are looking for longer mortgage terms to bring down the cost of monthly payments.
In June 2024, 22% of loans taken out by FTBs had a term of 35 to 40 years, according to UK Finance data. Just five years ago, the figure was 6%.
The government has a role in assisting FTBs because they are so important for the overall health of the housing market and wider economy
Harris says: “Longer mortgage terms are inevitable because they bring monthly mortgage payments down and help with affordability.
“Of course, in the long run, more payments are made so it ends up costing more — but, if that’s the difference between being able to buy now and not, many are prepared to go down this route. The 25-year mortgage term is a thing of the past.”
However, more conventional terms, such as a five-year rate, are currently cheaper than a two-year fix.
At the start of the final week of September, the average two-year residential fix was 5.45%, while a comparable five-year rate was 5.12%, according to Moneyfacts.
Murphy points out: “This means you can get a better rate. You can budget for the next five years based on the certainty of that payment, and with a longer term you’re going to be paying less right at the start of your mortgage when you probably need to the most.”
However, the BoE’s August rate cut has prompted signs of recovery in the market.
Our research has found that 50% of FTBs would consider or have considered using shared ownership as a means to get onto the property ladder
August “showed an improvement in sales market activity over the month, supported by the recent, modest softening in mortgage interest rates”, according to the latest residential market survey by the Royal Institution of Chartered Surveyors.
Its study reports an increase in the number of people looking to buy a home, with a net balance of plus 15 (up from plus 4 in July), the most positive reading since October 2021.
For the past three years, lenders have worked hard to support this key part of the market.
Skipton Building Society’s Track Record mortgage allows up to 100% loan-to-value borrowing, with the lender using the applicant’s record of paying rent to calculate borrowing.
Buckinghamshire Building Society has also launched a 100% LTV deal, where borrowers can use equity in a parent’s property to cut the overall net LTV.
Building more homes that may be desirable for downsizers, such as bungalows — could this unlock family homes for people to buy?
Principality Building Society and Halifax are among lenders that offer higher loan-to-income multiples for FTBs, of up to 5.5 times income.
And in September this year, Nationwide launched a product that allows FTBs to borrow six times income when taking a five- or 10-year fixed rate at up to 95% LTV.
Shared ownership
The Mortgage Lender distribution director Sara Palmer points to shared ownership as another example of younger buyers looking for novel solutions.
Palmer says this model “allows aspiring homeowners to part-buy, part-rent a property that may have otherwise been unaffordable for them.”
She adds: “Our research has found that 50% of FTBs would consider or have considered using shared ownership as a means to get onto the property ladder.”
The wider market would certainly benefit from a stamp duty reduction, or a holiday for downsizers, to free up more family homes
Building more homes is often regarded as the solution to the housing crisis. According to UK Finance, the UK has a shortfall of 4.3 million homes.
The new Labour government has pledged to build 1.5 million homes a year to boost supply. Over the previous five years, the country built only around one million homes.
Industry bodies are lobbying hard for measures to help FTBs and other parts of the sector, which should be included in chancellor Rachel Reeves’ Budget on 30 October. However, the government says it is grappling with a £22bn hole in the public finances, which will lead to “painful” tax-and-spend measures that will be balanced by a desire to “get Britain building again”.
The tightening of stamp duty, capital gains and inheritance tax rules have all been touted as capital-raising measures for the Treasury.
The 25-year mortgage term is a thing of the past
But Harris says: “The government has a role to play in assisting FTBs because they are so important for the overall health of the housing market and wider economy.
“Extending the stamp duty holiday, making sure enough homes are built in the right areas at the right price, and looking at extending government schemes should all form a part of this.”
Building types
Visionary Finance managing director Hiten Ganatra argues that the type of new homes the government wants to build is crucial.
Ganatra says: “Building more homes that may be desirable for downsizers, such as bungalows — could this unlock family homes for people to buy?
“I know this is difficult because such homes take up a lot of land that could be used more profitably by developers.”
But Murphy argues that the recovery demonstrated by the FTB market over the past year or so is evidence that this sector is weathering well.
He says: “I’m not sure any [FTB] measures are actually needed. However, the wider market would certainly benefit from a stamp duty reduction, or a holiday for downsizers, to free up more family homes.”
FTB numbers have remained remarkably strong given that average house prices continue to edge upwards
He also believes that the long wait between Labour’s victory in the general election, in July, and its first Budget, at the end of October, is destabilising the industry.
Murphy says: “We need to have the Budget. People are viewing homes but they are not making offers because they want to know what the Budget will entail and whether they will be adversely impacted by it.
“Everyone would have benefited from an emergency Budget in July rather than waiting until the end of October.”
Meanwhile, the money markets are pricing in further base-rate cuts by the BoE in November and December.
Action by both the central bank and the Labour chancellor in the final three months of the year may open up housebuying not only for FTBs but for the whole of the property market.
READ MORE ARTICLES FROM THE FIRST TIME BUYERS SUPPLEMENT BY CLICKING ON THE POSTS BELOW:
Leader: Help is out there
Feature: Onwards and upwards
Comment: Lowering the ladder for first-time buyers
YOU CAN ALSO VIEW THE DIGITAL EDITION OF THE SUPPLEMENT HERE