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”…
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:
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 Spareroom.co.uk, 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.