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.