First-time buyers remain excluded from UK housing market

House price falls have done little to improve the plight of first-time buyers struggling to get on to the property ladder.

Prices have dropped by just over 20% from their peak in October 2007 to their low point of a £148,000 average in February this year, according to the Nationwide index.

But while this steep fall in the value of property should have helped those trying to buy their first home, it coincided with the introduction of strict lending criteria by banks and building societies in the wake of the credit crunch.

As a result, just as property became more affordable, many first-time buyers found they were unable to raise the significantly higher deposits they now needed to get on to the housing ladder.

Figures from the Council of Mortgage Lenders show that just under 20,000 people bought their first home with a mortgage during September, the latest period for which figures are available.

But while the number is well up on the record low of just 8,600 people who got on to the housing ladder in January this year, it is still significantly below the more than 30,000 people who bought their first property each month during most of 2006 and 2007, and a peak of just over 50,000 in August 2002.

The CML figures also show that since the beginning of this year, the average first-time buyer has put down a 25% deposit, the equivalent of nearly £34,000 on the average priced first-time buyer property of around £135,000.

Given the fact that first-time buyers typically have incomes of just under £33,000 a year, it is unsurprising that the majority of people who are still able to buy their first home are thought to be getting considerable help from their parents.

The CML estimated in July that around 80% of first-time buyers aged under 30 were receiving financial help from the Bank of Mum and Dad.

For first-time buyers who are not able to count on this level of parental support the outlook is fairly bleak.

There are currently only nine mortgages available for people with just a 5% deposit, down from 1,079 in July 2007 before the credit crunch first struck.

There has been a slight increase in the number of mortgages for people borrowing 90% of their home's value in recent months, climbing to 114, up from a low of 71 in May, but the figure is still well down on pre-credit crunch levels of 780.

Consumers being offered a mortgage with only a small deposit can also expect to pay for the privilege.

The best two-year fixed rate mortgage for someone borrowing 90% of their home's value is currently 5.98%, offered by Nationwide, compared with a market-leading rate of 3.69% for someone with a 40% deposit or equity stake.

The difference between the two rates on a £100,000 mortgage would be £135 a month or £1,620 a year.

The frustration felt by first-time buyers is likely to be compounded by the fact that house prices are now rising again, with Nationwide showing that average property values are now nearly 10% higher than they were in February on a non-seasonally adjusted basis.

Many commentators are expecting further price falls next year, as the current market revival runs out of steam as more properties are put up for sale, but for now, first-time buyer affordability is becoming stretched again.

Halifax's house prices to earnings ratio, seen as a key measure of affordability, has begun to rise after falling steadily as house prices declined.

The group said the average property cost 4.54 times average earnings in October, up from a recent low of 4.26 times in April and above the long-term average of around four times.

First-time buyers also now find themselves caught up in a housing market where there are five potential buyers chasing every property for sale.

There is anecdotal evidence from estate agents that good properties in sought after areas are now being sold through sealed bids within days of being put up for sale.

First-time buyers are likely to come off worse in competitive buying situations such as these, as they are likely to have a smaller pot of cash to use as a deposit than former owner-occupiers, who benefited from the last housing boom, restricting their ability to raise their offer for a property.

On a more positive note, there are signs that lenders are beginning to ease their lending criteria slightly, and the CML is predicting a near-doubling in new mortgage lending to £15 billion during 2010.

But while this is well up on the £8 billion of estimated net lending during 2009, it is still significantly below 2007's figure of £108 billion, and it remains to be seen how much of the new lending will go to first-time buyers.

Sue Anderson, spokeswoman for the CML, said: "It's a very mixed picture for first-time buyers and it's riddled with uncertainty about what happens now with lending criteria and house prices.

"The supply of mortgage lending has eased slightly but not much, and the Bank of Mum and Dad may be less inclined or less able to help first-time buyers."

But she added that if interest rates remained low, affordability for people who were able to buy their first home should remain good.

The CML estimates that as many as 800,000 households that might have expected to become homeowners between 2007 and 2010 have been unable to do so.

It is not just first-time buyers who are suffering because of the current problems they face buying a home, as the shortage of people at the bottom of the ladder can have a knock-on effect on the whole housing market.

First-time buyers are often described as being the lifeblood of the property market because they buy the properties at the bottom of the housing ladder, enabling former owner-occupiers to trade up it. If people are not buying these properties, the whole housing market is in danger of stagnating.

Martin Ellis, Halifax housing economist, said: "It's important to have people coming in at the lower end of the market.

"The shortage of first-time buyers is one of the factors that has contributed to the low level of activity that we have got."

But there is some help available for first-time buyers. The Government has launched a raft of schemes to help people get on to the housing ladder, including enabling people to buy a share in a property or take out a shared equity mortgage.

There is also an initiative under which potential first-time buyers pay rent at a reduced level, to enable them to save for a deposit.

The Government also raised the threshold at which stamp duty kicks in from £125,000 to £175,000 from September 2008 until the end of this year, saving first-time buyers purchasing a property for up to £175,000, up to £1,750.

There are also signs that the current problems faced by first-time buyers have sparked innovation among mortgage lenders.

Lloyds TSB, part of the Lloyds Banking Group, has launched a Lend a Hand mortgage, under which first-time buyers only need to put down a 5% deposit to qualify for preferential mortgage rates, as long as a friend or relative is prepared to hold savings worth 20% of their home's value in a Lloyds TSB account as an additional security.

Skipton Building Society has a similar offer through its Mutually Exclusive mortgage deal, which also requires that savings are held to enable first-time buyers to borrow up to 95% of their home's value.

HSBC has also pledged to lend £1.5 billion this year to people borrowing 90% of their home's value.

But first-time buyers are not expected to return to the market in significant numbers any time soon.

The CML expects there to be a "slow and steady recovery" in first-time buyer numbers, similar to that seen after the 1990s house price correction, rather than a quick return to normal levels.