First-time buyers to remain largest home buyer group in 2019, with a preference for three-bedroom homes – despite market challenges
6th September 2019
First-time buyers to remain largest home buyer group in 2019, with a preference for three-bedroom homes – despite market challenges
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Tougher mortgage regulations since 2014 mean London first-time buyers (FTBs) now need £92k annual salary to buy a two-bedroom home to pass mortgage affordability stress tests, compared to £53k to pay the mortgage product rate
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For the rest of Great Britain, the difference is smaller and the barriers to FTBs are lower – the mortgage product rate requires an annual salary of £20k as opposed to £36k at the stressed rate
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Majority of FTBs outside London now searching for a three-bedroom home – leapfrogging past traditional one- and two-bedroom flat requirements
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Despite growing affordability pressures FTB numbers have been rising faster than other buyer groups – FTBs accounted for 36% of all housing sales in 2018 and are expected to remain the largest buyer group in 2019
Zoopla Research has launched an in-depth market report on FTBs, which concludes that FTBs will remain the largest home buyer group in the UK over 2019. The report analyses changing trends and barriers to home ownership faced by FTBs, particularly the impacts of higher property prices and new mortgage regulations and affordability testing which, while designed to stop households taking on excess amounts of debt, creates an additional hurdle for would-be purchasers.
Given the challenges FTBs face buying their first home, the report concludes that FTBs are taking a longer term view, typically seeking 3+ bedroom properties that they can stay in longer and grow into – certainly staying in their first home longer than their parents did. There is no evidence FTBs are rushing into buying smaller, lower value homes in order to force their way onto the market.
Unlike all other buyer groups analysed (existing mortgaged owner, cash-buyer, and buy-to-let purchaser) the number of housing purchases made by FTBs has been on a strong upward trajectory, up 85% since 2010 according to UKFinance. [See Figure 1 below].
Richard Donnell, Research and Insight Director at Zoopla, says: “First-time buyers have been the driving force behind the housing sales market in recent years. Lower mortgage rates, and improving mortgage availability have supported the growth in FTB numbers across the country. Despite increased barriers from high house prices in southern England and mortgage regulations, the appetite to buy their first home remains strong. Whilst the outlook is more challenging in London, growth in FTB volumes is expected to be driven in regional markets where affordability remains attractive, supported by greater availability of higher loan to value mortgages.”
Deposit requirements the greatest barrier
One of the greatest barriers to accessing home ownership remains the size of the deposit which still averages around 15% of the value of a property – double the average level before the global financial crisis. Schemes such as Help to Buy have supported those with small deposits and 14% of all FTB sales have been using Help to Buy. The growing availability of higher loan to value mortgages at or over 90% is also supporting FTB numbers by reducing deposit levels.
Mortgage regulations
A new hurdle for FTBs explored in the Zoopla research is the impact of new mortgage regulations designed to stop households taking on high levels of debt at a time when mortgage rates remain close to historic lows. An FTB looking to buy a home will typically find that the monthly cost of mortgage repayments at the so-called ‘product rate’ will be less than the average rent for the same property. However, in order to get the mortgage the buyer has to prove to the bank they can pass an affordability test, paying a higher ‘stressed’ mortgage rate to ensure they can manage an increase in mortgage rates. This stressed rate is often closer to 7% while the typical product rate is around 2% today.
Based on a mortgage product rate of 2.4%, FTBs in London and Great Britain (excluding London) need an income of £53,000 and £20,000 respectively to buy a property. However, when a stressed rate is applied the income required increases to £92,000 (London) and £36,000 (rest of Great Britain). [See Figure 4 below].
Richard Donnell comments: “It is not just the high house prices and large deposits first-time buyers need to overcome to reach their goal of buying their first home. Mortgage regulations introduced after the global financial crisis to ensure households do not become over-indebted mean affordability testing creates an additional hurdle. The impacts of these changes have been felt most in the highest value housing markets and London is the region where FTB numbers have fallen back over the last four years. Faced with affordability constraints, first-time buyers have two options: shift focus to buy smaller, less-expensive homes or take advantage of the increasing availability of high loan-to-value mortgages.”
No sign FTBs are compromising on quality of their first home
However, Zoopla’s research shows that FTBs are not plumping for smaller properties. In fact they are seeking out three-bedroom homes where the price is closer to the national average price. The most popular type of home FTBs enquire about on Zoopla’s portal are three-bedroom houses. Two thirds of FTBs are seeking houses and, stripping out London, this increases to 80% of enquiries – an average of 2.9 bedrooms.
Today, the average price of homes bought by first-time buyers outside London is just 8% lower than the regional average. Between 1996 and 2007 first-time buyers bought homes that were priced at 20% less than the regional average. [See Figures 5 and 6 below].
At the same time, growing availability of higher loan-to value-mortgages will support a growing cohort of FTBs. The latest data from the Bank of England shows that mortgages at, or over, 90% loan-to-value accounted for 19% of all mortgage lending in 2019 Q1, a post-crisis high. [See Figure 7].
Richard Donnell continues: “First-time buyers are not compromising on size and price of home. Our analysis suggests that they are taking the long-term view and buying a home with a longer-term horizon than they may have done in the past. Three-bedroom homes remain the primary housing type in demand and this drops to two-bedroom homes in London where housing costs and affordability pressures are greatest.”
The biggest buyer demographic this year
First-time buyer numbers have been on a strong upward trajectory since 2010, unlike other buyer demographics which have fluctuated up and down in terms of their growth across the last eight years. Zoopla expects FTBs to remain the largest buyer group in 2019, holding steady at 36% of sales. Over the next 18 months weaker growth in first-time buyer volumes in London and the South East will be off-set by continued growth in regional markets where affordability pressures are less of a constraint and where the greater availability of higher loan-to-value mortgages will support purchases.
Richard Donnell concluded: “The greatest potential for further growth in first-time buyer numbers is in the North West and Scotland, where growth has been most robust recently. Changes to the Help to Buy scheme in England from 2021 could have an impact on the 14% of FTBs using this scheme to buy their first home. However, the impact could be off-set by higher loan to value lending and newer forms of tenure such as shared ownership. First-time buyers will be the largest buyer group this year and there is no evidence that the long run appetite for home ownership will diminish any time soon.”
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