The Daily Telegraph - Saturday
It’s harder than ever to get on housing ladder
First-time buyers face large deposits, high prices and the difficulty of saving amid a cost of living crisis.
Disillusioned first-time buyers were offered some words of comfort by Sir Howard Davies yesterday. The NatWest chairman, who earns more than £750,000 a year, told the BBC Radio 4’s Today programme that savings hold the key to buying a house.
“I don’t think it’s that difficult at the moment,” he said. “You have to save, and that’s the way it always used to be.”
The insight from the City grandee, a former deputy governor of the Bank of England, came just days after figures from the Yorkshire Building Society revealed that the number of first-time buyers had fallen to its lowest level in a decade.
For Neal Hudson, a director at Residential Analysts, this reflects how “affordability challenges in saving for a deposit are perhaps the largest they have ever been”.
He says: “Thanks to high rates, the cost of paying for your mortgage is higher than it has been for over a decade, and borrowers are likely to be paying interest for a long time given they have much longer mortgage times.”
In other words, the problem is not that you need to save, but rather it is how much of your monthly salary you need to set aside and for how long.
A typical young family would need 14 years to save enough for a home deposit, according to the Resolution Foundation, up from eight years in the mid-1990s.
A previous estimate from 2018 suggested that a person aged 27 to 30 would need to save for 18 years if relying solely on their disposable income.
In fact, the most typical arrangement for today’s young adults is living with their parents, unlike in 1997 when it was in a couple with children.
However, Sir Howard’s remarks suggest that the main hurdle facing first-time buyers is the tighter lending criteria that came into place after the financial crisis.
He said that the main reason people find it hard to buy is “inherent in the change in the financial system as a result of the mistakes that were made in the last global financial crisis”.
Before the credit crunch, lenders were far more relaxed about who they would lend money to and how much.
However, measures to weed out reckless lending only portray a partial picture of changes over the past 20 years, says Ian Mulheirn, an independent economist.
“Definitely the big fall in homeownership really happened after 2007-2008 when the financial crisis struck and there was a sudden tightening as lenders became more risk-averse,” he says. “That is part of the story, there’s no doubt about it. But it is only one part of the story.
“The other part is much higher price-to-income ratios than we saw perhaps a generation ago.”
Figures from the Office for National Statistics show that the average property in 2022 cost 8.3 times the typical annual salary in England, whereas in 1997, this ratio was only 3.5.
It reflects that over this period, earnings in England and Wales doubled – while house prices increased more than fourfold.
From the late 1970s to the early 1990s, close to half of 25 to 34-yearolds owned their own home, according to the Resolution Foundation. This share has now dropped below 30pc.
Crucially, it is not for a lack of trying as four in five renters would prefer to own a home.
“It sounds like he [Sir Howard] needs to get out and talk to some young people and also understand the data better,” Hudson says.
The rise in stamp duty has also made it more difficult for first-time buyers to enter the housing market.
The levy on buying a home has risen more than tenfold since the mid-1990s, according to the HomeOwners Alliance, outpacing earnings and house prices.
Temporary reductions to stamp duty in recent years have helped bring down the time needed to save for a deposit slightly, according to the Resolution Foundation.
Andrew Wishart, of Capital Economics, adds that while young people today are hard-pressed, there have been times when things were even more dire.
“If you are looking at an 80pc loan-to-value mortgage and take into account interest rates, pay and house prices, the cost of a mortgage is still very high by historical standards,” he says. “But is not quite as high as it was when interest rates peaked in the late 1980s and early 1990s.”
The Bank of England’s base rate was close to 15pc in the late 1980s, whereas it is now 5.25pc.
However, Wishart says that a greater factor contributing to the fall in first-time buyers is that house prices
‘You can only save money if you have enough income to meet your expenses’
have raced far beyond what households can borrow, which means would-be buyers need a larger deposit.
For young people stuck in their childhood bedrooms or costly rented accommodation, the Bank of Mum and Dad is increasingly determining if and when they can become homeowners.
Nearly half of first-time buyers in their 20s were given an average leg-up of £25,000 by their parents or other family members, according to the Institute for Fiscal Studies.
Rachelle Earwaker, an economist specialising in housing at the Joseph Rowntree Foundation, also highlights the unequal impact of the cost of living crisis across generations. “You can only save money if you have enough income to meet your expenses,” she says “For millions that is not a reality.”