PER­SONAL AC­COUNT

The Daily Telegraph - Your Money - - FRONT PAGE - Richard Dyson

First-time buy­ers: read this wealth warn­ing be­fore you take the plunge

The Chan­cel­lor’s de­ci­sion to scrap stamp duty for first­time buy­ers was greeted with roars of ap­proval in Par­lia­ment on Wed­nes­day. In the out­side world, thou­sands of buy­ers will ben­e­fit and they, too, are pleased.

Along with Help to Buy and Help to Buy Isas, the move might prompt more first-timers to step on to the first rung of the hous­ing lad­der.

The dan­ger, though, is that they will be stuck there.

The Chan­cel­lor’s stamp duty mea­sure deals only with the en­try point of the hous­ing mar­ket. In fact, there is not a se­vere prob­lem there. The prob­lem is fur­ther up – all the way up – where stag­na­tion is deeply en­trenched.

Hence my warn­ing to any­one who is buy­ing for the first time now or con­sid­er­ing do­ing so in the near fu­ture: is the home you are buy­ing some­where you could en­vis­age stay­ing in for 10 years? If not, think very hard. You may be hop­ping into a home ownership rut and be­come stuck there, like it or not.

The three or four decades be­fore the fi­nan­cial cri­sis hit were char­ac­terised by rapid growth in house prices fu­elled at var­i­ous stages by ris­ing in­comes and – es­pe­cially in the 2000-07 pe­riod – the ris­ing avail­abil­ity of cheap mort­gages.

There were two con­se­quences: first, once home­own­ers were on the lad­der they quickly and steadily built equity. Se­condly, they were able to use that equity (com­bined with af­ford­able, eas­ily ob­tain­able mort­gages) to leapfrog their way up.

Thus evolved a “per­fect” sys­tem of fluid move­ment at ev­ery stage of the hous­ing spec­trum, with fam­i­lies mov­ing fre­quently and eas­ily.

The fi­nan­cial cri­sis shat­tered this model. Be­fore the cri­sis trans­ac­tions av­er­aged 1.6 mil­lion a year, but post-cri­sis they have sta­bilised at 1.2 mil­lion. Ac­tiv­ity in this re­duced mar­ket has been strong­est among cash buy­ers and – some­what per­versely, given the Chan­cel­lor’s em­pha­sis – first-time buy­ers (see graph).

The rump of the 400,000 non-movers are those ex­ist­ing own­ers who have a mort­gage but can’t af­ford to move to a more ex­pen­sive prop­erty. They are glued im­mov­ably in place by the in­ter­ac­tion of a num­ber of eco­nomic fac­tors.

Some of th­ese non-movers may have equity in their cur­rent homes, some may not. But even when they do have a lot of equity, the lack of easy mort­gages – and the fact that their in­comes are static, or fall­ing in real terms – means they can­not con­vert that equity into the next, up­ward step.

What would need to hap­pen to un­lock ex­ist­ing home­own­ers from their cur­rent rung on the lad­der?

There are three main po­ten­tial trig­gers: one, house prices could fall. Two, in­comes could rise. Three, mort­gages could be­come cheaper and eas­ier to ob­tain. None of th­ese is likely to hap­pen soon or sud­denly, if at all. What is likely to hap­pen, how­ever, is that the sta­tus quo will per­sist. Mort­gaged home­own­ers will con­tinue to see slug­gish if any growth in their equity. Their in­comes will not rise enough to per­mit a fur­ther move. Their mort­gage lender – al­ready em­bark­ing on rate rises – is go­ing to re­main averse to risk, and so credit will be tight. The glue will hold.

One of the most fas­ci­nat­ing in­sights into the hous­ing mar­ket to be pub­lished this year came from the Coun­cil of Mort­gage Len­ders (CML), the len­ders’ trade body, in June.

Ti­tled it sought to solve the rid­dle of the slump in hous­ing trans­ac­tions over the past decade and con­cluded that hous­ing mar­ket con­di­tions be­tween the Six­ties and the fi­nan­cial cri­sis in 2008 were not nor­mal but were, in fact, “unique”.

The re­port’s grim con­clu­sions were not widely re­ported at the time, but now – just as the Of­fice for Bud­get Re­spon­si­bil­ity, along with other fore­cast­ers, slashes pre­dic­tions of house price growth over the com­ing few years – are es­pe­cially sober­ing.

The CML’s re­port ended by lay­ing out a “daunt­ing view” in which there was “lit­tle hope for a rise in mort­gaged movers”. It added that “more unset­tling still, the op­tions avail­able for boost­ing move­ment among those with mort­gages are ex­tremely lim­ited”.

In­creased hous­ing sup­ply – as out­lined by Mr Ham­mond – might help, but not for decades.

First-time buy­ers be­ware. Your first move may be the last you make for a very long time.

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