At first glance the housing market appears to be thriving: for sale signs are being replaced by sold signs more quickly than ever, estate agents are reporting a surge in the numbers of would-be buyers signing up and the prices properties are being listed at are continuing to climb.
Things may slow down as parts of the country go into lockdown and housing markets are effectively shut but record low interest rates combined with a stamp duty holiday are putting more money into the system.
However, for first-time buyers the picture is grim because rising prices and stagnant wages have made raising a mortgage a problem in some parts of the country.
“Restrictions on lending mortgages to first-time buyers mean thousands of households will face yet more years of renting while they save up the deposit they need,” says Dan Wilson Craw, the deputy director of the campaign group Generation Rent.
“Many more people have lost work during the pandemic and are running down their savings in order to pay their rent. For all its claims to want a resurgence of homeownership, the government’s stamp duty holiday is stoking house prices and means that once renters’ finances have recovered, they will have soared out of reach again.”
The difficulties would-be buyers face are highlighted by analysis showing that three in 10 young households across Great Britain do not earn enough to pass lenders’ affordability checks for even an 85% mortgage. And on top of that, a deal of this type means saving up a 15% deposit, which many would-be buyers would find difficult or impossible.
The average price paid by first-time buyers hit £196,390 in July but there were huge variations across the country. In inner London the average price paid was £517,920, while in the north-east of England it was £110,280.
The research, done by Hamptons International for Guardian Money, looked at household earnings and average prices across Great Britain, and assessed how many would qualify for a home loan on a lender’s typical limit of 4.5 times a salary.
Affordability assessments are less crude than that, and take into account a potential borrower’s income and outgoings each month, but lenders will often not advance more than that.
The analysis used earnings figures around Great Britain, adjusted to reflect the level of pay that those aged 22 to 29 years old typically receive as a proportion of average earnings. It assumed two people buying together at the same wage but the household income could, of course, apply to someone buying alone.
The research found that to afford the average first-time buyer property in Great Britain, borrowers who had put together a 15% deposit would need a household income of £37,096 to get a mortgage. Assuming households of two people working full-time, it said 70% would be able to achieve that figure. However, they would need to raise a deposit of £29,458.
Aneisha Beveridge, the head of research at Hamptons International, says house prices have risen considerably faster than people’s incomes. “This has put the prospect of homeownership out of reach for many. But it’s prospective buyers in London and the south, where house prices have risen faster, that face the biggest barriers.”
Around Great Britain, the picture for first-time buyers is very different. Hamptons found that for an 85% mortgage:
• In the north-east of England, the average price is £110,280, meaning a household income of £20,831 and a deposit of £16,542 is needed to raise a mortgage. Nine out of 10 households should earn enough.
• In the south-east, the average price is £258,640, which needs a household income of £48,854 and a deposit of £38,796. Half of households should qualify for a loan.
• In Wales, the average first-time buyer place costs £143,110, and about 90% of households earn the £27,032 a year needed to afford a mortgage. But they need to raise a deposit of £21,467.
• Scottish first-time buyers pay an average of £123,990, requiring an income of £18,599, affordable for about 90%. The deposit needed is £18,599.
Few first-time buyers are likely to set their sights on the London borough of Kensington and Chelsea but should they do so, they will need to earn a huge amount to afford a mortgage, even if they can raise a large deposit. Homes in the borough sell to first-timers for an average of £1.1m, which means raising a deposit of £112,526 for a 90% home loan, and having household earnings of £225,052, Hamptons found.
But even in outer London neighbourhoods, the analysis shows that first-time buyers are being squeezed. In Haringey, north London, the average first-time buyer home costs £489,600. A 10% deposit will be almost £50,000 and earnings of £97,920 are needed.
Since the coronavirus crisis hit, banks and building societies have withdrawn almost all 95% mortgages
At the other end of the spectrum, homes in East Ayrshire in Scotland typically sell to first-time buyers for £78,900. A household would need an income of £15,780 and a deposit of £7,890 to raise a 90% mortgage.
Since the coronavirus crisis hit, banks and building societies have withdrawn almost all 95% mortgages, except those with terms and conditions related to the local area, and specialist deals involving financial help from a third party such as a parent.
However, earlier this month, Boris Johnson told how he wanted to create a new “Generation Buy”, with a market in low-deposit mortgages to help get young people on to the housing ladder.
He proposed plans for long-term fixed-rate home loans available up to 95% that could be guaranteed by the government in some form. This would be necessary because lenders would be allowed to do fewer “stress tests” on borrowers – reversing rules that were brought in after the financial crash.
Hampton’s analysis shows that there would need to be major changes to how much risk lenders were allowed to take on, as currently many borrowers do not earn enough to prove they can repay 95% mortgages.
Currently only one in four first-time buyers in London would meet the income requirements to buy a home in the capital using a 95% loan-to-value (LTV) mortgage. The average first-time buyer in London would need a deposit of just under £21,000 and a household income of £62,721 a year.
In contrast, 90% of first-time buyers in Scotland and the north-east of England, and 80% of those in Wales, would meet the criteria.
“The scheme will have differing success across the country and will fail to help over half of first-time buyers in London and the south, where the majority of buyers will struggle to meet the income criteria needed to take out the loan,” Beveridge says.
“There would need to be an increase in higher loan-to-income lending alongside the increased availability of high LTV mortgages for the policy to work in expensive housing markets. And this comes with additional risk.”
Maja Gustafsson, a researcher at the Resolution Foundation thinktank, says homeownership among young families has been falling for three decades, drive by “rapid house price inflation and snail-paced housebuilding”.
She says even if prices start falling, first-time buyers could struggle. “The combination of tighter lending criteria and the big income shock that young people are facing means housing is unlikely to get any more affordable in the foreseeable future,” she says. “That will only come with greater housebuilding in high-demand areas, including more affordable housing.”
Making an offer: how to boost your chances
When you get to the point when you are ready to buy, how do you ensure you make the right decision about a property and give yourself a good chance of getting your offer accepted? Jonathan Hopper, a buying agent and the chief executive of Garrington Property Finders, says as a first-time buyer you are in a strong purchasing position because you have no chain, “but that alone is not enough in today’s market”.
He has some tips on how to improve your chances:
Make sure you have sorted out your finances and have an “agreement in principle” in place for a mortgage before you start viewing property. Have evidence of this in place before starting any negotiations on a property as this will further demonstrate your strong purchasing credentials.
Have a conveyancing solicitor appointed ready to represent you. Do extra checks on the firm, its capacity, previous client reviews and support structure. Get the initial paperwork completed in advance, such as providing IDs and bank statements. Doing this in advance will mean you are ready to apply for searches at the earliest opportunity.
A lot of people will take the estate agent at their word regarding the price you will have to pay to secure a property. Do not lose sight of the fact that the agent is working on the seller’s behalf. There are tools on the internet that can help you estimate an accurate value of the property, such as previous sales data for similar nearby homes.
If you’re being asked to pay a significant premium don’t be afraid to walk away. We’re seeing a lot of competitive bidding scenarios but they are nothing to be afraid of. Sell your position as a first-time buyer with no chain. Demonstrate that you are motivated and organised, and don’t assume that price is the only mechanism available. If you can move quickly and offer the certainty of an uncomplicated sale, this could be more valuable to the seller than just getting the highest price.
When you make an offer, it can be very powerful to provide a personal letter to the owner, explaining why you want to buy the house and what it means to you. Sellers usually want to achieve the highest price, but don’t forget that they are selling their home. Often sellers want it to go to someone who will love it like they did. Send a copy of the letter to the estate agent, so they don’t feel like you’re going behind their back.
Developers are approaching the end of the financial year, and completed properties they haven’t yet sold may soon be discounted or offered with incentive packages.
Don’t stretch your budget at the moment, as it’s likely prices will tip in your favour if you’re patient. Things are quite frenzied right now but there are some signs it’s starting to calm down.