First-time buyers: the story behind the numbers
Published: 17 July 2013 | Author: Bernard Clarke
Our recent press release showed a strong increase in the number of first-time buyers. In May, lenders advanced 25,100 first-time buyer mortgages during the month – 29% more than in April. The recent data highlighted some distinct trends in the first-time buyer market:
- there are more of them;
- first-time buyers are entering the market with smaller deposits;
- they are borrowing more; and
- they are earning more.
Sometimes, however, figures reported during a single month – or changes in averages – may not present the whole picture. Here, we therefore attempt to drill down into the numbers and take a more detailed look at the profile of first-time buyers.
More first-time buyers?
With more than 25,000 loans advanced to first-time buyers in May, there are certainly more of them. The number of loans advance is the highest monthly total since the end of 2007, and a 42% increase compared to the same month last year.
It is worth reminding ourselves, however, that our data captures some people who we would not typically think of as first-time buyers. We include in our statistics all those who were not owner-occupiers when they took out their mortgage and we therefore capture a number of 'returners' – those who at some point in the past have owned their own home but have then sold it and perhaps rented, or moved abroad for a while, before buying again in the UK. So, some of the increase we report in the number of first-time buyers may partly be an increase in the number of 'returners'.
Chart One: Number of loans advanced to first-time buyers
The impact of the end of the stamp duty holiday in March last year had its biggest impact on year-on-year comparisons for March and April as the months either side of this. There is also likely to have had been some overhang affecting year-on-year comparisons for May. The effect of this could be to exaggerate the growth in lending in May this year, compared to a year earlier.
However, if we compare the total number of loans advanced to first-time buyers in the first five months of this year with the same period last year (which should remove any stamp duty related impacts), our data shows an 18% increase. So, there is no denying that first-time buyers appear to be staging something of a comeback.
Interestingly, the recent boost in lending to this group of buyers is occurring at the same time as a strengthening buy-to-let market. It is perfectly possible for both the buy-to-let market and lending to first-time buyers to grow at the same time – as the evidence clearly demonstrates.
A significant constraint for first-time buyers – and one that has been talked about extensively since the onset of the financial crisis – has been the size of deposit they typically need in order to access the market. What we saw in the aftermath of the credit crunch was an initial increase in the average first-time buyer deposit from the long-term norm of around 10% up to around 25%, before edging back to 20% – the level at which it has remained for more or less the last two-and-a-half years.
While average deposits have not returned to 10%, we have been reporting an improvement in requirements since the end of last year. We have previously noted a gradual increase in the take-up of loans with a 10% deposit, and a marginal increase in deposits of 5% (see Chart Two). Until now, this trend has not been large enough to budge the average loan-to-value (LTV) measure we report. But in May we did report an increase in the average LTV for first-time buyers from 81% to 83%.
Chart Two: First-time buyer deposits
Alongside the move towards slightly smaller deposits (as a percentage of the value of the property), we have also seen a gradual increase in number of first-time buyers able to buy without financial assistance. We estimate that, in the first two months on this quarter, 42% of first-time buyers were able to buy without being helped with their deposit, up from 37% in second quarter last year and from a low point of around 30% in the second quarter of 2009 (when the average deposit was 25%).
So, some first-time buyers are buying with a slightly smaller deposit – and are therefore likely to be able to do so without help. But this is not a sudden shift happening in the last month, and deposits do still remain elevated by historical standards.
First-time buyers have also typically been taking out larger loans – with this upward trend becoming more pronounced since the start of this year. In May, the average first-time buyer borrowed £113,400 – up from £109,600 at the end of last year.
In particular, an increasing proportion of first-time buyers have borrowed between £100,000 and £200,000, and between £200,000 and £300,000, while the proportion of those borrowing less than £100,000 has fallen over the last year (see Chart Three).
Chart Three: Size of advance to first-time buyers
This is perhaps not surprising given than first-time buyers are putting down smaller deposits and house prices have been increasing over the last year – in some areas, by more than 5%. One factor that could be driving this is a shift to purchases by first-time buyers in more expensive areas. For example if there were proportionally more first-time buyers in London, or other parts of the south east where house prices are higher, we would see upward pressure on the average loan size and shifts in other first-time buyer characteristics.
However, this does not appear to be the case. The spread of first-time buyers across the UK has hardly changed in the last year. We have also seen increasing loan sizes across all parts of the UK, suggesting this is not just a case of more people buying in London and the south east or other areas where houses are more expensive.
If first-time buyers are borrowing more, what does this mean for the affordability of the mortgages they are taking out?
The effect on affordability for first-time buyers has been partially offset by falling interest rates and an increase in reported incomes.
At £35,700, the average first-time buyer income has reached a record high. But this does not necessarily mean that the incomes of all potential first-time buyers are increasing strongly. That would seem at odds with the wider picture of stagnant incomes, with little or no growth.
The increase in average first-time buyer income has been accompanied by a rise – albeit modest – in the proportion if this group buying with a joint income. This could partly explain why average first-time buyer incomes appear to be moving out of line with income growth as a whole.
We might also expect to see an increase in average first-time buyer income if the average age of these borrowers is also rising. While the average age of a first-time buyer has remained remarkably stable at around 29, there have been some movements in the number of borrowers falling into the different age bands. So far this year, for example, 26% of first-time buyers have been aged over 35, compared to 23% in the same period last year.
An increase in average first-time buyer incomes may also reflect an increase in the number of 'returners' captured in our data, as we noted earlier. 'Returners' are likely to be slightly older than other first-time buyers, and may therefore have slightly higher incomes.
With first-time buyer incomes increasing and mortgage interest rates falling, first-time buyer loans on average have remained more affordable than a year ago, despite the increase the amount borrowed. For the first-time buyers who purchased in May, mortgage payments (including both capital and interest) consumed an average of 19.3% of income, down slightly from 19.6% in May last year.
The future affordability of these loans may be susceptible to changes in interest rates. Reassuringly, however, first-time buyers, like most other borrowers, are increasingly choosing to fix their interest rates. In May, 93% of first-time buyers – the highest proportion we have ever recorded – opted for a fixed rate, with longer term fixes (in particular, for four or five years) becoming more popular. Fixing their rate reduces the risk of payment shock for these borrowers for some time.
While the affordability of current borrowers appears to be manageable, for many potential buyers housing affordability pressures are still an issue. First-time buyers may now be able to purchase with a smaller deposit, but there are two key elements affecting the ability to buy a home: the size of deposit required and the on-going capacity to service the loan. Fixing the deposit constraint will not fix the on-going affordability constraint, and we may see the scales tip back to the pre-crisis position – when it was the relationship between house prices and income that posed the biggest problem.
If house prices continue to rise and income growth remains subdued, owning a home may move out of the reach of increasingly more people. The mortgage market is clearly open for business, but it is crucial that housing supply increases to ensure that affordability does not become an insurmountable hurdle for current and future generations of first-time buyers.