Average first-time buyer will take 27 years to save for a deposit ‘even if prices fall’
Wages set to dip and banks likely to tighten lending criteria
UK house prices have risen to such astronomical levels that it will take the average first-time buyer 27 years to save up enough for a deposit – even if property prices plummet due to the coronavirus pandemic.
In a cruel irony for aspirant homeowners, that perfect “starter flat” or “investment property in need of some modernisation” they have had their eye on could move even further out of reach, even as prices fall, according to the Resolution Foundation.
The think tank’s findings will deal another blow to any renters who have not already resigned themselves to
a life of insecure and overpriced private tenancy.
In 1990, it took a couple on average earnings around four years to save for the deposit on a typical home, if they set aside 5 per cent of their income each month.
By 2019, that figure had jumped to 21 years.
That depressing figure takes into account the fact that, until recently, many lenders were offering mortgages with just a 5 per cent deposit, while 10 per cent deals are still commonly available. Things may be about to become more difficult.
Many forecasters, including the Office for Budget Responsibility, think house prices could fall sharply as people lose their jobs and businesses go bust over the coming months.
In the OBR’s most pessimistic scenario, the average house price drops 22 per cent and takes years to recover.
This is not the boon for first-time buyers that it might first appear. Firstly, in this scenario, many people’s incomes are also likely to fall, cancelling out any reduction in the price of a home.
Second, it is not the actual affordability of property – in terms of monthly mortgage payments – that is the problem. In fact, with rates so low, the cost of paying a mortgage has rarely been cheaper.
The thing that keeps that first rung on the ladder out of reach is the deposit. And it may soon be pulled further away.
If banks and building societies fear there could be a big drop in house prices they are likely to do what they did after the last recession in 2008-9 and hike the level of deposit they demand from borrowers.
Banks like to have a buffer against falling prices. The last thing they want is a load of customers with mortgages that are much bigger than the property they’re supposed to be secured against. That would leave banks on the hook for hefty losses if those borrowers lose their job, can’t pay the mortgage and the bank wants to repossess their home.
If lenders raise the average first-time-buyer's deposit to 20 per cent, as they did after the last recession, then even if the OBR’s worst nightmare comes true and prices fall 22 per cent, it would take a typical couple 27 years to save up their deposit, according to the Resolution Foundation’s sums.
“The coronavirus crisis has had a big impact on the education, career prospects and incomes of young people – and unfortunately there’s no silver lining for this group when it comes to house prices,” explains Lindsay Judge, policy analyst at the Resolution Foundation.
“Although prices are projected to fall – perhaps dramatically – in the wake of the pandemic-induced recession, this drop won’t make things any easier for typical young first-time buyers looking to purchase their first home. Instead, falling incomes and credit restrictions will likely make home ownership every bit as difficult as before for many young people.
“Only those who already had high levels of savings before the pandemic started, or those who are able to borrow from their family, will truly benefit from the house price fall. This means the current crisis looks set to deepen pre-existing inequalities and the growing divide between those who are able to look forward to home ownership, and those for whom this dream is increasingly out of reach.
“Going forward, policymakers must ensure that young peoples’ incomes are protected in the wake of the coronavirus crisis, and that their competitive advantage as first-time buyers is maintained when the stamp duty holiday comes to an end.”