The challenge of entering the property market has always been a significant hurdle for first-time buyers. However, in today’s economic climate, that challenge is becoming increasingly insurmountable, particularly for those without the advantage of financial support from family. The barriers to homeownership are growing, and for many, the aspiration of owning a home remains a distant dream. Without decisive action, we risk creating a generation of lifelong renters, a situation that will only exacerbate the problem in the future.
Several key issues are currently preventing first-time buyers from securing a place on the property ladder:
House Prices
Over the past decade, house prices have soared, and the latest figures from the Nationwide house price index indicate that this trend shows no sign of slowing. The persistent imbalance between supply and demand, fuelled by years of inadequate housebuilding, continues to drive prices upward. Although the new Chancellor has pledged to increase the number of new homes constructed each year, it remains to be seen whether this commitment will translate into tangible results.
For first-time buyers, rising house prices mean the amount needed for a deposit has also increased, pushing the possibility of homeownership further out of reach. Moreover, the larger the deposit required, the larger the mortgage needed, making the prospect of buying a home increasingly unattainable.
Interest Rates
While house prices have been climbing steadily for the past decade, interest rates remained at historically low levels for most of that period. This situation made mortgage payments relatively affordable for those who could manage to save a substantial deposit. However, since December 2021, there has been a sharp rise in interest rates, with the Bank of England maintaining these higher rates longer than anticipated. This rise has placed a significant strain on affordability, making the prospect of keeping up with mortgage payments a considerable challenge for potential homeowners. According to the latest BSA Property Tracker Report, 63% of those hoping to buy a home cited the affordability of mortgage payments as a major barrier.
Mortgage Availability
Building societies have traditionally been at the forefront of offering innovative solutions to assist first-time buyers. Many have introduced products with features designed to meet the specific needs of this group, such as mortgages requiring no or very low deposits. While these products provide some relief, they are not sufficient to address the broader issues at play. Lenders have the potential and willingness to do more, but their efforts are hampered by restrictive mortgage regulations.
A recent report by IMLA highlighted the need for the Government to create a framework that explicitly recognises the interests of future first-time buyers. The report also called for a reassessment of affordability regulations, particularly focusing on the Financial Policy Committee’s Loan-to-Income (LTI) flow limit. This rule restricts lenders from offering more than 15% of their mortgages at or above 4.5 times income, a restriction that IMLA argues is misaligned with the rest of the affordability framework.
Mortgage Finance Gazette report on first-time buyers, published in April 24, underscored the shift that has occurred since the financial crisis. The balance between maintaining financial stability and supporting first-time buyers has tilted too far towards stricter regulation, to the detriment of the social benefits that come with higher levels of homeownership.
The Consequences of Inaction
The cumulative effect of these factors has led to a dramatic decline in the number of first-time buyers, a trend that shows no signs of reversing. Currently, two-thirds of prospective homeowners believe the deposit required to purchase a home is prohibitively high. This is hardly surprising when the average deposit now stands at £60,000, a staggering 160% increase from the average deposit of £23,000 in 2005. In contrast, wages have risen by less than half this amount over the same period.
Without bold interventions, the future looks bleak for today’s and tomorrow’s first-time buyers. The situation could worsen, leading to even more dire consequences.
A recent report by Standard Life revealed that those who continue to rent into retirement could require an additional £391,000 in savings compared to those who own their homes by the time they retire. This stark statistic highlights the long-term societal impact of failing to address the affordability crisis facing first-time buyers. It raises a critical question: How likely is it that individuals or families who struggle to save the £60,000 deposit needed today will be able to amass an extra £400,000 to cover rental costs in retirement? And this £400,000 is on top of the retirement savings needed for general living expenses.
Looking Ahead
First-time buyers are facing an unprecedented affordability crisis today. If left unresolved, this crisis will only grow, leading to even greater financial challenges in the future, particularly when these individuals reach retirement and their earning potential is diminished. The time to act is now, before the problem escalates further and the consequences become even more severe.
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