November 15th, 2011
The 360,000 first-time buyers who bought in 2007 are likely to be trapped in their first homes, says a press release dated yesterday from the bank HSBC.
The research isn’t brilliant. What makes this story so unusual and, for me, interesting is that despite it being such an obvious and serious problem so little has been written about it.
So what’s the story?
The press release says: “A typical first-time buyer who bought in 2007 with a 10% deposit would have started with £16,000 equity. However, much of this will have been eroded by the £11,000 fall in their property value, meaning just £5,000 of their original deposit remains.
“Assuming they have been making capital repayments on the mortgage for the past four years, these FTBs would now have paid £11,000 off the loan, so would currently have £16,000 equity in their property – almost exactly the same as when they started.”
The research may be a little (well quite a bit) flimsy and details open to question, for instance it deals in averages (arithmetic means) and we all know that circumstances vary greatly household to household, place to place.
But, for all, that the message is clear. There are lots of relatively young people, many presumably looking to start families, living in their (small) first homes who can’t raise the money to trade up to more suitable homes.
Naturally some of the more fortunate would be able to trade down to more suitable homes in less suitable (desirable) locations.
Anyway, the HSBC release suggest that what lies behind this problem is the fall in prices, an average of 7% since 2007 on its calculations, and that first-time buyers have not been stashing away cash ready to fund the trading up.
One might argue that this is a problem that the mortgage providers (HSBC included) could have addressed in how they structure their products – but that’s a different argument.
What the HSBC research doesn’t really get to grips with, in my view, is the real mathematics that have resulted in this, although there is some hint in the note it makes that London prices have actually risen over the past four years.
And a comment by Pete Dockar, head of mortgages, does make the point that “first-time buyers can no longer rely on rising house prices to provide them with the deposit needed for their second purchase”.
The reality is that this problem will not be and is not confined simply to those who bought at the peak of the market.
There has been for some years an inherent first-time buyer trap in the market that receives very little coverage. Providing house prices are rising fast, the problem is disguised. But with low house-price inflation the trap becomes very evident.
It is an inconvenient truth that jars with the emphasis that Government and industry puts on prompting more young people onto the housing ladder.
There are numerous ways you can do these sums, but underlying this issue is that the UK housing and mortgage market has never properly adjusted to low inflation and low interest rates. And the pre-crash lunacy really didn’t help.
About two years ago I wrote a blog entitled “The cruelty of force-fed first-time buyers”. On the basis of some simple fairly reasonable (I think) assumptions I did some sums that show how low inflation (and earnings growth) and low interest rates (which prompt house prices to rise) extend the average time from buying a first home to buying a second home.
I wrote then that: “A closer look at the mathematics of house buying seems to be telling us that it now takes first-time buyers twice as long to trade up to their second as it used to a decade or so ago. And that is with some pretty favourable reading of the numbers.”
On the assumptions I used the time doubled from four to eight years and, for simplicity, I ignored factors such as transaction costs which would make the sums even more disheartening.
The HSBC research seems to support the view that the time to trading up will extend unless you stash cash alongside paying off your mortgage.
What worries me is that housing policy is so bent on prompting and teasing more first-time buyers onto the housing ladder. Unless they have a realistic chance of reaching the next rung, this is exploitative and unfair and in the long term will damage both the housing market and the economy.
The problem of second-time buyers has been with us for a long time. But it has been hidden. However, the more first-time buyers who are coaxed onto the housing ladder the more chance, as things stand, that the problem will increase.
If the time to trade up increases the net effect will be fewer transactions and, on current patterns, that probably means fewer homes will be built. (see this blog for a graph showing the pattern of transactions and new build)
It is extremely important that young people have the opportunity, as did their parents, to buy homes should they wish. But forcing the issue rather than solving the structural problems that dog the housing market will lead ultimately to a deeper crisis.