First-time buyers (FTBs) are the engine behind a healthy property market. Peer down the telescope of a long property chain and the chances are that you’ll discover an FTB. Furthermore, it’s their decision to take a step on the first rung of the property ladder that ultimately drives price growth. Without them, demand falls off, supply becomes static, and the result is a standstill. Sound familiar? According to Jon Neale, head of development research at Knight Frank, during the 1980s and early 1990s, FTBs accounted for 45%–50% of mortgage lending. Since 1995, however, this figure has been declining, and hit a low of 29% in 2004, before rising more recently to about 35%.
The number of new loans made has been dropping, so the total number of FTBs joining the market has fallen dramatically. In 1994, almost 300,000 people bought their first homes; by 2004, this had dropped to a little more than 100,000. Today, the biggest stumbling block for FTBs is not property prices, but the lack of finance available. In the cold light of a recession, 100% loans and lending on multiples of more than four times salary was never wise. But most lenders are now demanding a 20% deposit.
Simon Gammon of Knight Frank Finance says: ‘A year ago, there were more than 1,000 mortgage products for those with 5% deposits. Now, there are at most 15.’ There are a number of steps that could be taken to ease the situation. One way as suggested by the Royal Institution of Chartered Surveyors would be the establishment of a specific savings scheme for FTBs. Based on the ISA, it could benefit from tax exemptions and even Government contributions. RICS suggests that the Government pays 15% into the account on the first £5,000 saved each year. Any withdrawals would have to be used for a home and the buyer would have to live in the house for a set period.
It would encourage FTBs to save for a deposit rather than getting themselves more into debt. ‘A savings scheme with Government contributions will ensure as many new buyers as possible buy with a deposit, reducing the need for 100% or higher mortgages, and help move us towards a sustainable and vibrant housing market,’ explains James Rowlands, RICS public policy officer. Mr Neale says a similar scheme works well in Australia: ‘First Home Owners get a grant of AUS$7,000 irrespective of income or status, which in some cases rises to AUS$14,000. There’s also a government-backed savings account that benefits from tax exemptions. It pays in 17 cents for every dollar that potential FTBs save.’
The Council of Mortgage Lenders backs recommendations made late last year by Sir James Crosby, former head of HSBC, which included guaranteeing mortgage backed securities. It believes this is the way to restore the flow of funding to ‘ease mortgage rationing’. Another alternative, supported by Ivor Dickinson, managing director of Douglas & Gordon, is for the Government to abolish, or significantly raise, the bottom band of Stamp Duty: ‘Incentivising the market by removing Stamp Duty on properties worth less than £250,000 is one way to kick start the bottom end of the market, which is essential to get the whole thing moving again.
In the boom years, wealthy buyers were pulling the market up from the top end, but then the chord was severed, leaving the market very vulnerable.’ But Lucian Cook, director of residential research at Savills, thinks that measures such as tinkering with Stamp Duty will be ineffective if access to mortgage finance isn’t tackled.
The expansion of the home-buy scheme where interest-free loans are available on a proportion of the purchase price of a property is an option he supports. ‘More radically, the Government could consider some form of tax relief on gifts to children for the purchase of a new home for a limited period.’ Mr Gammon believes that, as the Government effectively owns some banks, it is in a position to force them to create suitable products for FTBs. ‘If banks are worried about the lenders, the Government could underwrite part of the loan. For instance, 20% of the loan could be underwritten by the Government, on condition that the borrower puts down 5% and with strict repayment conditions. The other option is for the Government to lend money to FTBs themselves and take an equity stake in the property. The repayment could be like a student loan, with a finite term and criteria.’