First-time buyers and affordability: a fresh perspective
Published: 14 December 2011 | Author: Bernard Clarke
There is widespread sympathy for first-time buyers, given the affordability problems they face. Our surveys show that aspirations to home-ownership are as strong as ever, with 85% wishing to be owner-occupiers in the long term. But since 2008, the number of first-time buyers has declined from a long-term average of around 500,000 a year to just 200,000.
Affordability for first-time buyers is affected both by the size of deposit and the ongoing costs of monthly mortgage payments. It seems clear that the main affordability challenge for first-time buyers currently is the size of deposit.
Data we published last week shows that the amount of income they pay in mortgage interest is now at its lowest for almost eight years. On average, interest paid by a first-time buyer taking out a mortgage in October consumed only 12.3% of income.
But deposits are a different matter. As recently as 2007, first-time buyers paid deposits averaging 10% of the purchase price of the property but, by 2009, this had risen to 25%. More recently, however, there has been some reduction and average deposits now stand at 20%.
Currently, the average deposit for a first-time buyer is over £26,000. That represents 79% of the average annual income from which the mortgage is paid. The size of deposit has doubled since 2007, when it averaged around £13,000, or 37% of annual income. (Average first-time buyer income has declined since 2007.)
Our earlier analysis
Against this backdrop, it is timely to re-visit our analysis of how first-time buyers afford to purchase their home. Our previous work has shown that a rising proportion of young first-time buyers have needed help to get on the housing ladder from the 'bank of mum and dad.'
This increase was driven first by rapidly increasing house prices. Between 2000 and 2007, the Department for Communities and Local Government (DCLG) reported that the average UK house price more than doubled from £106,000 to £214,000.
Then, as the funding crisis took hold from late 2007, first-time buyers were affected by more restrictive loan-to-value requirements. The average size of deposit increased from 10% to 25% of the purchase price of the property between 2007 and 2009.
To date, our research in this area has focused solely on first-time buyers aged under 30, to avoid the unknown element of those that we have described as "returners" - buyers who have, in fact, owned previously but are now returning to owner-occupation from a different tenure and so are captured as first-time buyers in the data.
Returners typically have substantial sums to put towards a deposit over and above their savings (from the sale of previously owned property) and cannot be distinguished from assisted first-time buyers in our statistics. However, we analysed the English Housing Survey and found that there are materially no returners aged under 30. So we restricted our analysis just to this age group, allowing us to identify more unambiguously those buying with and without assistance.
A new approach
In this update, we adopt a slightly different approach. We widen our analysis to estimate all first-time buyers, regardless of age, who buy without assistance (but we have not sought to exclude returners from our data). In Chart One and Table One, we set out estimated numbers and proportions of total first-time buyers who are unassisted. In order to provide a comparison with previous research, Table One also shows the proportion buying without assistance in the under-30 age group.
Chart One: First-time buyers: numbers and proportion unassisted
Table One: First-time buyers and assistance, 2005-2011
The data clearly shows the impact that changing market conditions have made on the ability of households to become owner-occupiers.
Until 2007, rising house prices reduced the number of them able to buy without help. Initially, however, the decline was relatively modest - a fall from 69% unassisted in mid-2005 to 62% by late 2007. Over this period, house prices were continuing to rise (the DCLG recorded a 16% increase), but first-time buyers were not yet having to pay higher deposits (the average remained at 10%) and borrowing rates were low and stable.
Over the next two years, a combination of funding constraints and adverse market conditions led to a progressive tightening of loan-to-value criteria. As a result, and despite rapidly falling house prices, pressures on first-time buyer affordability intensified. By the second quarter of 2009, therefore, only 33% of all first-time buyers were able to buy without assistance. Since then, the proportion buying without assistance has recovered, but only very modestly, with only 36% buying without assistance in the third quarter of 2011.
These changing conditions for would-be first-time buyers are brought into even sharper relief when we look at the ability of different age groups to buy without assistance (see Chart Two). Unsurprisingly, the most profound changes have been seen for younger borrowers, who have had less time to save up. In 2005, over half of borrowers aged under 25, and nearly three-quarters of those aged 25-29, were able to buy without assistance. But, by 2011, these proportions had fallen to just 8% of under-25s, and 27% of those aged 25-29. And, although less pronounced, there are also significant declines in the proportions of first-time buyers able to buy without assistance in all older age groups.
Chart Two: Unassisted first-time buyers: proportion of each age group
Unsurprisingly there is also wide regional variation, as Table Two shows. Inner London boroughs dominate the list of local authorities where assistance is most prevalent. In Hackney, for example, 81% of first-time buyers in 2011 were either returners or received assistance. And a similar incidence of assistance is found throughout central London and (to a slightly lesser extent) the rest of the south. At the other end of the spectrum, Wales, Scotland and Northern Ireland typically have much lower proportions needing help - in some parts of Northern Ireland, for instance, only 37% of first-time buyers in 2011 were returners or assisted.
Table 2: Percent of first-time buyers buying unassisted, UK regions
The average age of a first-time buyer
One pervading finding is that, almost without exception, the proportion of unassisted first-time buyers declined dramatically from 2005 to 2011 in every part of the UK. This was driven initially by higher house prices and, latterly, by the requirement to pay a higher deposit. In 90% of all local authority areas, the proportion buying without assistance fell by between one quarter and one half from 2005 to 2011.
Despite the increasing affordability challenges, our data indicates that the average (median) age of a first time buyer has remained remarkably static over time.
But, as we have shown, first-time buyers are not a homogeneous group. And recent years have seen considerable changes in their profile – and in the ability of people to buy without assistance at different ages.
Average age of unassisted first-time buyer: 33, not 37
Since 2005, when we began our regulated mortgage survey, the median age of all first-time buyers has remained essentially unchanged at 29, subject to some "white noise" fluctuation (see Chart Three). But, by contrast, the typical age of all those buying without assistance rose sharply, from 30 in early 2008 to 33 just one year later. And, subject to some fluctuation, it has remained at this elevated level since then.
Chart Three: Median age of first-time buyers
While it is dangerous to over-interpret this shift, it is important to note that age statistics - and particularly medians, usually evolve only very slowly over time. So, a rise in median age of this magnitude in just one year is unusual, driven in part by the need for first-time buyers to build up a much larger base of savings.
A figure repeatedly quoted by many commentators says that the average age of an unassisted first-time buyer is 37. This is, in fact, not correct.
Unhelpfully, it stems from our previous work focusing solely on those aged under 30. First-time buyers in this age group had become so heavily reliant on parental assistance that the effect of removing those aged under 30 and receiving assistance was to exclude the vast majority of all first-time buyers in this age group. As a result, the average age of the remaining group of first-time buyers was significantly higher, and stood at 37 in 2008.
With our new approach, which looks at unassisted first-time buyers regardless of age, we can now consign this misleading figure of 37 to oblivion and more unambiguously estimate the average age of an unassisted first-time buyer at 33.
In what is likely to continue to be a challenging environment, deposit requirements are likely to remain elevated in the immediate future. The recent modest increase in the proportion of unassisted first-time buyers may reflect the gradual easing of loan-to-value criteria we have seen this year. But against a hugely uncertain financial backdrop, it remains to be seen whether the industry will have the ability to continue lifting loan-to-value limits.
At the same time, wage growth is sluggish and pressures on household budgets are continuing to intensify. While these factors continue to bear down on the ability of young people to save for a deposit, the ‘bank of mum and dad’ is likely to continue to see a lengthy queue of applicants.