God help the first-time buyer

Each night I kneel by my bed and thank the Lord that my health is good, that I was not born a Spurs fan and that I’m not a first-time home buyer. I’m not a scaremonger but I believe all the ingredients are there for a crisis in the FTB segment of the UK housing market, and if this proves to be the case, it may have massive repercussions.

Only once has the market managed to survive a lengthy period of FTB disconnect: 2004-08, when it was displaced by buy-to-let purchases (a situation that may have disguised the origins of today’s problem). That sector is now moribund, and likely to remain so for the next two to three years. Meanwhile the lost generation of FTBs has not been re-enfranchised by a housing recession. Indeed I’d say FTBs have become even more alienated from home ownership.

So why has this crisis occurred and can anything be done to resolve it?

First, let’s not try to kid ourselves that the FTB doesn’t matter. Traditionally, 15-20% of transactional activity relies on the FTB sector and ultimately the housing market will seize up if FTBs are excluded. The problems facing them are as follows:

• Affordability. This is as bad as at any time in the past 40 years. The average deposit is equivalent to a year’s disposable income, or five times what was required 25 years ago. The Council of Mortgage Lenders recently estimated that the average FTB without access to external financial assistance was able to get onto the housing ladder at the age of 37.
• Mortgages. The consequences of the meltdown in financial markets are likely to afflict banks’ willingness to lend for a decade. Perhaps we are at the lowest ebb now – does the relaxation of loan-to-value (LTV) rates by Santander last week mark a positive turn? But in general lenders will be insisting on higher LTV rates than in the noughties, and the capacity of the market has probably shrunk by 20-25%. It is estimated that the number of available mortgages with a LTV of 80% or better has fallen from about 2,800 in 2007 to 750 today. The days of 100% mortgages are a sweet, distant memory.
• Society’s changing attitudes. Today’s youth are the “now” generation in terms of chattel ownership and damn the expense. The savings ratio is officially at or around its post-war low for under-30s. Moreover it is not improving, as it is for almost all other age categories. Nor is the situation helped by unemployment in the 18-24 age group, which has risen faster and higher than any other.
• Government assistance. FTBs account for the lowest percentage of the housing market in three decades yet there is a raft of government schemes in play to help them, from Housing Corporation grant to enable shared equity sales to the successful HomeBuyer Direct scheme and Kickstart. It is estimated that HomeBuyer Direct will account for up to 10,000 sales before its cessation in 2012, and Kickstart a similar number. However, the public purse is empty and I can see the shared equity schemes ending in 2012.
• Housebuilders deserting FTBs. I have some sympathy for the housebuilders’ predicament, but the evidence is that they are strategically turning away from this segment in favour of the trade-up and family home market. Much as they will claim the shift is demand-driven, it also suits their desire to restore profitability quickly through higher selling rates. Ironically in the current environment, it also helps improve sales rates. Take Barratt, for example, formerly the first-time buyer’s friend. In the six months ending December 2009 65% of its completions outside London were houses rather than apartments and in current production terms the ratio is about 75%:25%. The NHBC estimates that in the past two quarters, less than 15% of new house sales have been to FTBs and if we exclude sales benefiting from government assistance, the total is barely 5%.

In summary, I believe the FTB market over the next five years is facing problems of crisis proportions. Can anything be done to ameliorate the problem? Unless we are prepared to accept an era where rental tenure and extended family residency is the norm, then we need to act. Here’s what I’d be doing for starters (pardon the pun).

• HomeBuyer Direct is a commendable scheme but I would look at alternative ways of achieving better leverage with the private sector. The housebuilders can be innovative in this regard if the government plays ball.
• Lenders need stronger inducement to lend to FTBs, and FTBs have to start saving. I’d like to see some form of guaranteed savings plan, perhaps an ISA-based tax-free scheme with conditional entitlement to a mortgage.
• The planning system has a part to play too, especially quasi-government bodies like the HCA. I would like a more active and focused land and planning policy to help deliver FTB products, even if it is somewhat dictatorial in nature. Again it is about leveraging available assets to stimulate the private developer.
• Finally, offer tax incentives to parents who support their offspring with deposit assistance, perhaps even through some form of efficient equity withdrawal scheme.

We have to tackle this problem before it drags the entire housing market down; I mean, my three offspring are virtually all at FTB buyer age now!