First-time buyer market in UK facing hard times

The number of first-time buyers in England has not changed in the last ten years and numbers are down on 20 years ago, according to the latest official figures from the Department of Communities and Local Government (DCLG).

This is quite startling considering the government has been pouring money into building new homes and helping first-time buyers get on the housing ladder for several years now. It all seems not to have had the impact promised.

Indeed, I would argue that it is perhaps even harder to get on the housing ladder and this is borne out in the annual housing survey from which these figures come and a number of other signs.

Let’s just look at the DCLG figures in a little bit more detail. In 2015/2016 there were 654,000 first-time buyer households in England, amounting to around 4% of all households and 5% of all owner occupier households.

The overall number of firsttime buyers decreased from 922,000 households in 1995/1996 to 675,000 households in 2005/2006, and has remained at around that level since. The research also shows that compared with a decade ago, today’s first time buyers are older, more likely to buy with a partner, and to have dependent children.

Some 74% of first-time buyers were couple households, a marked change since a decade before when it was 66%. The report suggests that this may be due to an increasing need for two incomes to be able to buy.

And while house price growth is slowing, so are sales, new buyer enquiries and new buyer instructions, according to the latest residential market report from the Royal Institution of Chartered Surveyors (RICS).

There are reasons for the slowdown such as the European Union referendum, the snap general election and general economic and political uncertainty around Brexit, but I don’t buy these arguments. The election announcement in April was mid-month, too late to have any real impact and at the time, the result looked in little doubt and research indicates that Brexit is not regarded as a big deal among home buyers.

But what all the pieces of analysis seem to indicate is that it is the slow interest rate environment that is keeping first time buyers going, the fact that if they can manage to save a deposit they can are least get a bargain bottom mortgage.

This is what makes me worried. We need first time buyers and the historic low level of interest rates will not be here forever. Indeed, pressure is building for interest rates to be raised following a surge in inflation to a five year high.

The Bank of England’s monetary policy committee (MPC) is tasked with keeping inflation at around 2% in the years ahead but the consumer prices index (CPI) climbed to 2.9% in May, up from 1.8% at the start of the year.

The surge in inflation has caught markets by surprise and led to a shift in expectations for rates. Markets, as of the beginning of July, expected the Bank of England to order the first increase as soon as January 2018. Only a month earlier, the expectation had been for a delay in raising rates until the summer of 2019.

At the June meeting of the MPC, three of the members voted for a quarter point rise while five, including Governor Mark Carney, opted for holding the bank rate at 0.25%, but he has also indicated that some removal of monetary stimulus is likely. In recent days Azad Zangana, senior European economist and strategist at Schroders, pointed out that the sharp rise in inflation has coincided with a slowdown in economic growth along with wage growth and the Bank of England has to decide whether the inflation the UK is experiencing at present is temporary or permanent.

While the bank rate affects wider borrowing costs, including mortgages, this is not always directly. Some mortgage deals are linked to the rate and would rise immediately but the standard variable rates, or SVRs, that most borrowers pay are set at discretion of the lender.

The pricing of new fixed mortgage deals is influenced by market expectation. So it should be noted that the wholesale cost of five year fixed rate money, known as swaps, has risen sharply in the past month, up from 0.77% in early June to more than 1% in early July.

With first time buyer numbers not rising in a decade, Help to Buy clearly not helping enough, house prices still rising, albeit at a slower rate, not enough supply meaning that first time buyers are competing for an ever dwindling choice, an interest rate rise could be disastrous an signify hard times ahead.