Is the UK suffering a second home buyer crisis?

By Leith van Onselen

The Daily Mail last week published an interesting article on the plight of second-time (upgrader) home buyers in the UK, who are increasingly becoming trapped in homes that they have outgrown due to a lack of (or negative) housing equity following a period of house price falls:

Growing families have no choice but to stay in homes that are too small because they cannot afford a larger property, a report reveals today.

For many years, one of the biggest worries about the housing market has been the struggle faced by first-time buyers who cannot get a mortgage.

But today’s report, from banking giant Lloyds, highlights the problem of the previous generation – the so-called second steppers.

They are typically 40 years old, bought their first home five years ago and want to move on to the second rung of the housing ladder. In many cases, they have settled down, started a family and need extra bedrooms for their children.

In a sign of how dramatically the tide has turned against this generation, the report says there were just 320,000 home-moves in total last year, compared to 865,000 a decade ago.

This means that there are thousands of people who need to move home but cannot, typically for financial reasons.

One of the biggest problems faced by second steppers is that the average deposit required to move up the housing ladder is now £62,000, compared to just £39,000 in 2002… But the average second stepper has only £11,500 of equity in their current home – that is, the value of their home minus the mortgage…

With the huge cost of moving to also consider, from stamp duty to legal fees, the report says this means they have ‘very little to put down as a deposit on the next home’…

To make matters worse, Lloyds warns that many second steppers are in negative equity, which means the value of their property is less than the size of their mortgage.

It states: ‘There are many potential second steppers who bought at the peak of the market in 2007. Many of these are likely to be in an even worse financial position, often with negative equity.’

Nitesh Patel, housing economist at Lloyds, said: ‘Even though many of today’s second steppers won’t have bought at the height of the market, many are still going to struggle to make that move up the housing ladder.

Certainly, reports of negative equity households in the UK is understandable given that house prices have fallen by between -2% (Financial Times) and -20% (Halifax) since prices peaked, depending on which house price series is used (see below chart).

What is most interesting about the UK experience, however, is that the plight of second-time buyers comes amid improved conditions for first home buyers (FHBs).

In particular, UK mortgage rates have plummeted since the GFC and are now tracking at around 4% only (see below chart).

Due to these falling mortgage rates, in addition to lower house prices, UK housing affordability is now tracking above the 30-year average, according to Halifax (see below chart).

Finally, the availability of mortgage credit has also improved, with the latest Bank of England Credit Conditions Survey reporting improved credit access over the past year (see below chart).

I often write about how problems in the FHB market can cause knock-on effects up the chain, since prospective upgraders tend to sell to FHBs. However, the UK appears to be experiencing the opposite phenomenon:

‘House prices have been falling or flat for the past four years. As a result, many are still in a very low equity position. The difficulties faced by aspiring second steppers are having a considerable knock-on impact on potential first-time buyers due to the resulting shortage of properties available on the market.’

It comes after planning minister Nick Boles said more homes must be built or home ownership risks becoming ‘the exclusive preserve of people with large incomes or wealthy parents’.

The last point is the key issue, in my opinion. The highly rigid urban planning system in the UK has created a severe structural shortage of homes, which can only be fixed via supply-side reforms (see here and here for detailed analysis). Demand-side policies cannot fix the UK housing system.

Unconventional Economist
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  1. Home upgrading (property ladder) is usually very bad financial practice. This is due to the fact that buying and selling costs a lot of money and very little equity is gained during firs years of mortgage repayments. Upgraders usually sell first home after only 5 to 10 years – before they build almost any equity. Than they spend most of that equity on selling and buying costs.
    The only times, this worked were boom times, but those days are gone. Even if home prices continue to grow with inflation, or slightly above, Buying to sell in less than 10 years is bad financial decision. Difference can be significant: renter can be better of by tens of thousands of dollars.

    • Yes. The boom times have punished those thinking like this as during the time it took them to save for a decent deposit to buy a place they could live in 10+ years prices got away from them.

    • Agreed property hopping can be a poor & costly decision. I have seen several family members and friends do this, luckily for the most part they were saved from getting stuck due to rising prices, but those who’ve bought in the last couple of years and want a change might not be so lucky.

      In many cases first home buyers would do better putting off their first home purchase until they are ready to move into a home which will meet their needs for 10+ years. That means forget buying the squishy apartment or mcmansion in the outer suburbs just to “get on the property ladder”. Wait until you have a deposit ready for a house large enough (and positioned in the right location) to cater for the family you envisage/plan to have in 10 years.

      • That’ll be my approach if I buy… but looking at more like a place for 20 years (after which the kids may be making their own way and we can think about a downsize).

        Who can say how life will unfold over that time but you can at least give yourself a chance of not having to move if you wait for the right place. And save a lot in transaction costs…

  2. I think that I read recently that 95% of land in the UK us owned by just 5% – or something along those lines.

    That plus ridiculous heritage restrictions don’t help.

      • Yep it was something like that. You can’t change history that dates back to William the Conqueror.

        • What % of the population in Australia, owns “95% of the land” by volume?

          Why is 5% or less, unexpected or a bad thing? Should we all be hobby farmers instead of letting a small % of the population have efficient sized farms?

          Actually, the crime against social justice is in not letting everybody have an affordable urban quarter acre or so – this would only eat into the rural land holdings of “the 5%” by less than one percent. We would still have severe inequality of land ownership by volume – and so what? The big obscenity is the injustice and the anti-democratic way in which ownership of the 0.4% that is URBAN, (or in the UK, the 8% that is urban) is being “shared”.

          • This is good point. Governments own around 25% of all land.

            Farms still take up around 60% of all the land in Australia or 80% of all privately owned land. Only 120k farming families (1.5% of population) own 80% of available land. If we look how much additional 300k families with large lifestyle land blocks own, percentage is likely go over 95%.

            If we look the other way: if every urban household (cities with 100k+) owns 1000sqm blocks, that would add up to only 0.8% of all land in Australia. Clearly almost all land is owned by few people here as well.

  3. When Brian Pitman was Chief of Lloyds during an earlier UK property recession, which from memory coincided with some de-industrilaisation of the North, the bank would allow transfer of negative equity to a new home to facilitate a person moving to a better job in a new area. (early to mid 90’s)

  4. I don’t know about the Daily Mail being a reliable source of news. However, many friends locally in a similar position. Their current home, even with good equity isn’t nearly enough to go a four bedded with two bathrooms in same area. It’s been very instructive to learn about.

    • Aqaurian – exactly.

      Sometimes you hear people say “falling property prices don’t matter if you are buying and selling in the same market”.

      It’s rubbish – at least for anyone who has a mortgage – and the UK experience shows why.

  5. Variable rate mortgages are effectively interest only for the first say quarter of the mortgage. Very little principal is paid off during the first years, meaning that the balance on which interest is charged remains near the original balance and the interest in the following year remains almost all of the monthly repayment.

    That is why the trading up scenario doesn’t work for people in stable, low inflation, low growth markets. It is also why the successes of 23 to 25 year olds borrowing to the hilt on property 30 years ago while they still had lots of pay increases in front of them doesn’t work now when many aren’t forming permanent relationships and purchasing until the early thirties after they have already had most of their pay rises (except perhaps for those who did very long courses and have long periods of career progression, certainly not average/median home buyers).

    If you are highly indebted with non-deductible home loan interest, then keeping expenses very low and applying any increase in earnings to the mortgage not better living standards in the first 5 to 10 years will save 10’s of thousands in interest over the life of the loan.

    Similarly buying a cheaper property at the start with redrawing rights so that you never fail to pay off your credit card in full even when you might have a 3 to 6 month period of unemployment will save lots of interest, allow you to pay off earlier and then buy an investment property as part of your savings and investment plan if you then think it worthwhile.

  6. Many UK couples are losing their second income as retail continues to collapse at a frightening rate. HMV just going into administration, not longer after Jessops, Comet and JJB Sports. The smart couples were those that got a FHB mortgage in one name only, leaving the other partner to get one of the 95% FHB deals going around now. Quite possible when a decent 4 bed home is only 110K in Glasgow. Those with a degree or a trade are plodding along ok, for everyone else its quite a struggle to even get 7K deposit together for a 2 bed flat that has dropped from 90K to 65K in just 4 years.

    • “…..a decent 4 bed home is only 110K in Glasgow…..”

      110K in pounds sterling?


      In affordable cities in the USA where there are no urban growth containment policies, the same home, most likely newer, and most likely on a much larger section, would never have risen above 110K in US dollars.

      Poms and Aussies are just so out of touch re fair value, it is astonishing.

      • US population density is 1/3 that of the UK. In fact if you eyeball de populational density of the different US states and property price listings they match nicely. The only exceptions are the oil and gas hotspots of Montana, Wyoming and Utah (USA´s version of WA). The only way the UK can accomodate more people affordably (regarding infrastructure and soaring energy costs) is going up. Anybody who has lived in the UK and particularly the South will say that it is packed and hellish. Building over the remaining countryside is not going to improve their problems regarding water, traffic and infrastructure decay.

        USA population by state:

        Property prices US:

        • You could put every man, woman and child in the UK on a quarter acre and barely use a quarter of the land area.

          There’s plenty of space.

          • Absolutely. Germany’s land urbanisation rate is well above the UK (28% versus only 8% in England). And guess what? Germany’s home prices have been stable in real terms since the 1970s, whereas the UK has experienced four booms/busts and homes are very expensive (and small).

            England only seems overly crowded because its population has been packed into less than 10% of the land area, thanks to no expansion of urban boundaries (the “green belt”) since the late 1940s.

          • It is extremely amusing to read a transcript of a Q and A session that Frank Lloyd Wright held at a Conference in London decades ago. Unfortunately it is only to be found in compendiums of FLW’s complete works. Someone really should post it online.

            The Poms were pleading that they did not have room for FLW’s expansive ideas on house sizes and section sizes. He ended up saying “I doubt you gentlemen’s arithmetic”. He also said “mountains make the best building sites of all”.

            Frank Lloyd Wright also made the point that Leith makes here, that the Poms have mental images of the existing conditions in cities, and mentally transfer that to “the entire countryside”; he said that it was an insult to the architecture profession to claim that LOW density development of the kind he was advocating would “ruin the countryside”, when done right, it would ENHANCE it……!

  7. The UK upgrader problem is a likely outcome of current plans to encourage construction by giving grants only to first time buyers of newly constructed property. When the time to trade up comes you will not be selling a new house so no FHB interest supporting the market (until they change policies again anyway).

  8. If stamp duty were payable by the seller and levied on the capital gain, it wouldn’t add to the woes of second-steppers who don’t have any capital gains.

    In the mean time, home owners who need more space can avoid stamp duty by renting the new address and putting tenants in the old address. If they do this in Oz, they can even stick their snouts in the negative gearing trough.

    Besides, there’s little reason to believe that the house you want to live in is the one you want to buy. Buying a house is an investment decision. Living in it is a consumption decision. Chalk and cheese.

    • Gavin,
      On the way to work I was a thinking about something, and then I thought about something else and all of a sudden I was thinking about the term dole bludgers. It is a phrase the is really divisive and (to my mind) derogatory. Then I thought about what I had been recently reading about economic rents and the idea of a land tax. Why not begin to call those who sit on large tracts of land to the detriment of others land bludgers. It will bother some but in my mind it may it is just as applicable as the dole variation and the battler has already been conditioned to dislike bludgers. Perhaps it is crude, but unfortunately to get ideas into the public sphere crudeness seems to work.

      • “Land bludger”? I used the expression four years ago. Michael Janda used “bludger” in the same connection six years ago.

        OTOH, if you’re trying to convince land owners that it’s in their interest to finance infrastructure out of uplifts in land values, perhaps you shouldn’t start by calling them nasty names.

        So it’s a bit of a dilemma.

        • I did think about that dilemma. Vilification of one group to promote an agenda will never bring the best long term benefits. You would want to use it like you did in your article to highlight a point and not paste a label.

          • Actually, it constantly irritates me that the chief culprits in the land banking racket, as in most successful rent-seeking schemes, are the bureaucrats and politicians, and yet they seem to totally escape being targets of commonly heard rhetoric. Land bankers already do cop a little bit.

            But business men involved in actual productive activity, employing people and making stuff, seem to come in for the most rhetoric of the lot. Henry George said over a century ago that it was a tragedy that “labour” had never worked out that they sank or swam WITH their employers, and the common enemy of them BOTH was the land and finance rentiers.

            Not a lot has changed. I do not know of a single politician of the Left at any level anywhere in the world who is against growth containment urban planning, for example. If they really cared about their claimed political constituencies, you would think they would appreciate the housing affordability that results from lightly regulated urban land supply regimes as in heartland and southern USA.

  9. This problem isn’t new – it is exactly what happened to me. I bought my 1st UK property, a unit, at the peak of the market in 1987. When I eventually sold it 11 years later it still had negative equity. Luckily I had earned enough and saved enough in the intervening years to be able to accommodate the loss when I bought my second home (a house). I would have been a lot better off if I had rented instead of bought, but I was young and naive and listened to my elders and betters who told me I better buy now else I would never be able to afford to get on the housing ladder… sounds familiar ?????