UK first home buyers trapped

By Leith van Onselen

The United Kingdom (UK) housing correction has now entered its fourth year. Depending on the indices used (explained here), UK home prices have declined by between -5% and -19% since peak (more in inflation-adjusted terms):

However, it’s been a two-speed correction, with London home prices now rising, but much of the rest of the UK still falling in value (see below chart from RICS).

With UK home prices falling in real (inflation-adjusted) terms, and mortgage interest rates near record lows, housing affordability continues to improve:

Yet despite the improved affordability, 2011 recorded the lowest number of first home buyers since records began in 1974:

Around 187,000 people became first-time buyers in 2011, which was 7pc fewer than the preceding year and less than half the recent peak of 402,800 seen in 2006.

The figure from Halifax, the lowest recorded since it started tracking the data for the UK, will stoke concerns that a generation of Britons is locked out of the property market.

Hefty deposits mean first-time buyers are struggling to get on the housing ladder despite prices being at their most affordable in eight years, according to Halifax’s annual First-Time Buyer Review…

Difficulties raising the necessary deposit and concerns over the economic climate are preventing many from entering the market”…

Halifax says…the average first time buyer deposit in 2011 was just over £27,000 compared to less than £17,500 in 2007.  As a proportion of the purchase price, the average deposit has doubled to 20pc in 2011.

According to the UK housing ministry, the average age of UK first home buyers (without assistance) was 37 years old in 2010, whereas the Council of Mortgage Lenders (CML) claims that it is 33 years old currently. Either way, increasing deposit requirements appear to be crimping first home buyer demand (despite lower mortgage rates), with the average deposit required now 10 times higher than two decades ago according to the Guardian.

Another pernicious aspect of the UK housing situation is that many recent first home buyers have become trapped in their homes due to falling valuations:

Falling house prices have trapped more than 350,000 first-time buyers in properties bought at the peak of the market, a bank has warned.

Young people buying their first home have seen an average of £11,000 wiped off the value of their properties since 2007, according to a report by HSBC.

Some have even found themselves in negative equity, where their property is worth less than the mortgage they took out to buy it. Others are unable to make the move to a second, bigger property because of the huge cost of moving home.

HSBC said first-time buyers in Northern Ireland had been worst hit by price falls, with those who first bought in 2007 facing a 42% decrease in the value of their home. This would mean negative equity of £45,000.

London is the only region where the price of first-time buyer properties has risen since 2007, by 1.7%. However, despite having £48,000 of equity in their first homes, second-time buyers in London still face a struggle to raise enough to afford to trade-up…

But Matt Hutchinson, director of flat and house share website, said few people now trying to buy their first home were actually benefitting from the lower prices.

“It is a frustrating time for many prospective buyers because they are having the carrot of some very attractive mortgage rates dangled in front of them, but because they aren’t able to afford the sizeable deposits still demanded by lenders, homeownership continues to remain just out of reach,” he said.

“If you add into the mix that demand for rented properties at the moment is driving rental costs higher and higher, forcing first-time buyers to dip into their deposit funds to pay rising living costs, then taking that first leap on to the property ladder seems a distant and forlorn dream.”

Howard Archer, chief UK economist at IHS Global Insight, agreed: “There still seems to be significant difficulties in getting a mortgage for many people, notably including the need to raise high deposits, particularly for first-time buyers. And there is significant concern that banks’ future ability to lend to homebuyers could be hit by difficult wholesale funding conditions.”

Archer predicts house prices will fall a further 5% by mid-2012 because of low consumer confidence and weak economic fundamentals.

One of the “weak economic fundamentals” facing the UK housing market is rising unemployment, with the unemployment rate increasing recently, presumably on the back of continued austerity measures (see below chart). One shudders to think what will happen to UK unemployment after the London Olympics finishes later in the year:

Without renewed interest from first home buyers, the UK housing market is likely to remain in a funk, which could also place the retirement plans of the baby boomer generation – who reportedly holds around 80% of Britain’s net personal wealth (mostly housing) – into jeopardy.

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  1. Hmm and what will happen when the UK exists the Liquidity Trap ? My guess is markets will raise rates on the nation formely known as Great Britain, bringing on a collpase much like Andy Xie is predicting for Japan.
    There really is no way out of this ongoing financial nightmare

    • “….There really is no way out of this ongoing financial nightmare…..”

      I agree. Only a minority of us can even see that there is a nightmare, and the reasons for it; but I don’t know anybody who has a convincing solution.

      If I was made dictator, I’d simply abolish all restraints on urban growth and hope for the best. I’d also allow deliberately high monetary inflation for a few years to work in favour of people in debt on land and houses, as the real price of urban land fell (which it should, and no recovery will occur without this happening).

      • Thanks God you are not in that position PhilB. I quite agree with removing restraints on urban growth but allowing for high inflation for a few years? Why punish the savers Phil, just because they are a minority and did the right thing? What would the lesson be then. Borrow, borrow until there is not tomorrow coz Phil the dictator will save you ass the day after tomorrow.
        Sounds a bit unfair to me.

        • Believe me, I have agonised over that point at length.

          It would be very nice to protect the few responsible people who have saved, during the inflationary period. The ideal measure would be to actually give the newly created money to the people with savings, rather than giving it to the banks directly.

          • Tis why I don’t agree fully with Prof Keen’s jubilee proposal. It should be done on an equity basis (i.e. those who have paid down their debt or haven’t gone into debt) not wholesale handouts….not that its ever going to happen of course.

  2. I have friends in London and they’ve been considering leaving for the last six months because the employment and economic situation there has been deteriorating since the GFC. The problem is that they want to return to our golden shores (and they ain’t so golden anymore!). The situation is much worse outside London and the Home Counties apparently… It’s the 1980’s all over again.

    • Yeah, I know of a number people leaving Oz to go back to the UK because of the high cost of houses and living here.

  3. All through this article all I can see is that LVR’s can and do determine end house prices.

    I’m sure some first home buyers would come in at lower prices but since banks increase the amount of deposits as the prices fall they no longer can and the decline accelerates.

  4. There is anothern statistic that it would be nice to know, besides “the average age of a first home buyer” in each market.

    That is, what is the average age of the NON HOME OWNING class?

    I bet this has risen too, possibly more dramatically than the age of the first home BUYERS. What the average age of first home BUYERS doesn’t tell us, is how much OLDER people are getting without any prospect of EVER owning a home.

    By the way, the so called “caring” left calls this “exclusion”, but they are too dedicated to “planning” as the top sacred cow of their political beliefs to see that their planning is actually the CAUSE of exclusion of any kind.

    • I hope the QLD election result was at least partly a repudiation of loony anti-growth government. The refusal to allow sensible flood control dams because of environmental impact (a continued sop to “Green” wag-the-dog political allies), must have been the last straw. I am baffled at the media’s silence on this aspect.

  5. I remember the 90’s in the UK very well. Negative equity was a very big issue and was well reported in the MSM. Negative equity sapped demand and casued real distress to first time buyers. There was a real sense of being trapped even by those able to maintain repayments and a readiness to hold on to your job as the recession bit. When looking for a house in 94 (avoiding the worst of the declines) it truly was a buyers market. I had an agent send me close on 100 flyers in a single mail shot one time, though that was a bit unusual. The next swathe appear to have quickly forgotten the lessons learnt 10 years before.

  6. Housing has always been expensive here, when I left the UK I had a mortgage and was paying $180 (Ninty quid)a month (2bed apartment) when I got here I was paying rent on a 2 bedroom unit of nearly $500 a month. That was back in 87.