Challenges facing first time buyers

Many Britons have homeownership aspirations, yet the reality of the situation is that a number of these people are unable to take that crucial first step onto the property ladder.

High deposit demands from banks and lenders combined with the private rental trap leaves potential homeowners with very few options. This begs the question; do first time buyers stand a chance in this economic climate?

House prices

One of the first things that potential buyers will have to content with is house prices. Official figures from the Office for National Statistics (ONS) show that in the 12 months up to April 2012, house prices remained relatively low and only increased by 1.4%.

Whilst this is bad news for homeowners looking to sell, first-time buyers are able to benefit from low prices. However, prices naturally fluctuate depending on the location. London house prices have sharply risen over the last two years along with some parts of the South East, compared to property prices in the North of England where they have significantly fallen.

Annual house prices have increased by 1.7% year-on-year in England and Wales. ONS figures show that annual prices in England increased by 4.9% because of the rise in London property prices and increased in the South East and South West by 2.1% and 1.6% respectively.

Big deposits, small savings

Since the global economic crash in 2007, banks and lenders have restricted their lending, especially to potential homeowners. The crash of the American housing market spooked others across the world and mortgage lending was viewed as a much riskier idea.

As a result, 95% and even 90% Loan-To-Value mortgages became almost non-existent, meaning buyers had to stump up large deposits starting at an average of 20%. In 2009, some lenders were asking for 40%, which means that on properties of £160,000, a deposit of £64,000 was required. Compare this to 2007, when the average deposit was just 10%.

As many could not afford to own a home, the demand for rental accommodation soared, allowing landlords to push up prices. Those who were trapped paying high rental prices could not afford to save for the large deposits. Now, lenders have calmed down and have eased some restrictions on mortgages, however many are still still stuck in the same situation.

The government recently stepped in as the situation was becoming so dire and they proposed a series of reforms such as the new homes scheme. The new homes scheme could see the return of 95% LTV mortgages for first time buyers on new builds. This is part of the coalition’s ‘Housing Strategy’ which also plans to re-introduce the Right-to-Buy scheme.

Renting trap

New research from Barclays shows that the cost of owning a home is almost £200,000 cheaper than renting over the course of a lifetime. This worrying figure illustrates just how harsh the private rental sector is at the moment.

As first time buyers are pushed into the rental sector for longer, there is a risk of them renting for much longer than initially anticipated. The research highlights the cost of home ownership and renting over a 50 year period.

The study found that paying for a mortgage and maintaining a home costs an average of £429,000 over 50 years, compared to a massive £623,000 in rent.

Andy Gray, Head of Mortgages at Barclays, said: “The cost of stepping on or moving up the housing ladder can be a big barrier for many, but the long term benefits hugely exceed the initial expense.

“Not only will you save money by becoming an owner occupier, but you will also own a substantial asset once your mortgage is paid off, providing financial security for your old age. Those who choose to rent permanently will have to pay their landlord out of their pension income, while owner-occupiers will enjoy minimal housing costs.”

Stamp duty

Chancellor George Osborne announced in his 2012 Budget that he would not be extending the stamp duty holiday. This means that first time buyers now have to pay the full amount on the stamp duty, whereas before it was relaxed so that those buying properties between £125,000 and £250,000 would not have to pay any stamp duty at all. Now, it has returned to the 1% levy for buyers on properties between £125,000 and £250,000.

At the beginning of the year there was a flurry of first time buyers bidding to snap up properties before the stamp duty holiday came to an end. As a result, 43% of houses were bought by first time buyers in March. This fell to 32% in April and is now in line with the long-term average number of first time buyers.

ONS reports that the economy has had a significant impact on the housing market: “The decrease in the proportion of first time buyers had a differential impact on average house prices in some regions, where they decreased in March and then increased in April 2012.”

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Posted by: WarrenWilson Categories: Buying, Estate Agents Tags: , Comments Off on Challenges facing first time buyers

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