Housing for first time buyers

House-PoundI have long been interested in housing although we have generally rejected the idea of building a property portfolio as a means of generating passive income.  I was therefore very keen when the Money Principle was invited as a well-informed blog to participate in a seminar for first time house buyers.

This is one of a series of posts planned on housing.

Why is UK property so expensive?

We are a relatively small island with a large population so you may expect a premium price but that isn’t the whole story.

I think there are three additional reasons:

  • In the 1980s, people who were renting their house from the municipal authority – a perfectly respectable option – were allowed to buy it at a heavily discounted price.

Many did and I don’t have a problem with that.

Except money from the sales was not ploughed into building more houses – it went to the government.

  • At the same time, retail banks were allowed to lend more freely.

Again I don’t have a problem with that.

It is better for lending to be driven by responsibly policed demand than have the government or central bank decide now much can be lent.

  • We are not building enough houses.

House completions have fallen from about 200,000 a year in the 1980’s, to between 130,000 to 160,000 in the years before the financial crisis to fewer than 100,000 a year since then.

This compares with 300,000 to over 400,000 a year between the 50s and 70s, the difference entirely due to a collapse in municipal building.

The market response to demand has not been to build more houses but to elevate the price, which is much easier to do and therefore almost inevitable.

In a country with 23 million housing units each lasting maybe 100 years, we clearly need to be building 230,000 houses a year just to stand still.

But with a growing population – up from 56 million in 1970 to 64 million now (about 180,000 a year increase requiring perhaps 50,000 housing units) – we clearly need rather more.

We have survived so far on the generous house building of the 1930s and the post-war housing boom but we must be at least a million homes short.

We are seeing the result of at least 30 years of political neglect.

Low wage inflation

These three have generated a property price boom with inflation sometimes in the 10s of percent per year.

For a time, this was not a problem because wages also rose and there was general inflation in the economy.

But since the late ‘80s, wage rises have been steadily reduced so that in many cases today they are non-existent and inflation is a distant memory.

We are sitting on a time bomb. 

House prices have climbed so much with stagnant wages that values now approach 6 times income rather than the 3 times of 20 years ago.

As rents rise with house prices, people are spending an unhealthy amount on housing whether they are buying or renting.

For those at the bottom of the pile, the bill for support for those low waged or unemployed in private rented accommodation, Housing Benefit, has ballooned out of all proportion.

And for the young, maybe burdened with student loans and facing uncertainty in the jobs market, the combination is very difficult.

Housing is the toxic part of the British economy.

Not only does it divert our attention from building profitable businesses but it diverts lending from more useful parts of the economy.

A bank will lend to someone who will move heaven and earth to pay their mortgage because it is a roof over their head rather than to a business that needs investment to keep ahead.

You can’t blame them.

You cannot cut the price of houses. 

The stock market, pension funds, mortgage providers and the economy in general would collapse so it is both politically and practically impossible.

But no effort should be spared to stabilise house building at a level where prices don’t grow out of proportion, and boost the economy so that wages eventually catch up.

This will take time – perhaps another 30 years – but it must be started now.

So where does this leave young people today requiring many times income multiples just to ‘get on the ladder’?

How can first-time buyers save for a deposit when rents are so high? 

Some can take advantage of the Bank or Hotel of Mum and Dad but what about the rest?

If you only have a deposit of 5% of the house price, the interest rate is as much as 5%; if you can find 25% as a deposit, you can get promotional rates as low as 1.88%.

This makes a big difference.  In England, the government has stepped in with various schemes to help people to buy a home, under the general banner of Help to Buy.  There are similar schemes in Scotland, Wales and Northern Ireland.

The main two schemes are an equity share scheme for new houses – as long as you have the 5% deposit the government will own up to 20% interest-free for 5 years then you start paying for it – or for all houses, the government will guarantee up to 15% of the mortgage.

These allow people to get the lowest interest mortgages and they are designed for owner occupation, not for Buy to Let.

The seminar.

With this background, the seminar was an opportunity to meet and discuss the issues confronting first time buyers with the panel of property experts.

The event was hosted by Lloyds Bank but don’t be alarmed.

Recall that Lloyds took over HBOS, which includes the Halifax.  So Lloyds is the UK’s largest mortgage provider and they know what they are talking about, particularly to do with first time buyers.  There was no promoting of Lloyds or Halifax products at all.

The seminar was chaired by Sarah Smith from Channel 4 TV.

Taking part were Miles Shipside of rightmove.co.uk and a former estate agent, George Clarke, presenter of Amazing Spaces and Restoration Man  on Channel 4, Holly Thomas, financial journalist on the Sunday Times and Craig McKinlay, Director of Mortgages for Lloyds Bank.

About 50 members of the public came and many interesting questions were asked to which the panel gave extensive responses.

A lot of tips emerged from the discussions which I will discuss these in a post next weekend.

The whole proceedings were videoed and we will also post a link to that once it is available.


12 thoughts on “Housing for first time buyers”

  1. Borrowing 6 times your income is really scary. I like the help to buy scheme and the part buy, part let, although it looks like prices are even higher, you don’t see it because it is “affordable” on a monthly basis. Still, if it is cheaper than renting, you will build some equity instead of nothing.

  2. It can be @Pauline, but it is not the mortgage that is necessarily 6 times income – it’s the house price. For first time buyers of course this may be close to the same thing!

    There has been a house price bubble, particularly in London, but I think this was driven mainly by the Funding for Lending that was introduced and went mainly into mortgages, particularly Buy to Let mortgages. Mark Carney, Governor of the BoE, sat on that one last November.

  3. In the US, you can find housing at a variety of prices, but it is unlikely to find low prices near a major metropolitan city. Housing around Los Angeles is very expensive, but you can find lower prices further away.

    1. The same here although there are parts of Greater Manchester for example where you can pick up a house for well under £100k that needs some work while elsewhere the prices even of ‘ordinary’ houses are £300k+ and in some parts up to a £million. The problem is that the median income really hasn’t changed much in the last 10 years or so – it is maybe £25k and not much more in London where house prices are ridiculous.

  4. I purchased a home that was almost 1.5 times my income. The mortgage works out to be about 15% of my gross income. I bought in a very nice area but I bought an awkward (and SMALL) property. People teased me when I was looking at it because Americans outside of NYC and San Francisco tend to prefer larger sized homes. I just knew what I was able to afford comfortably and that housing prices were going up by quite a bit in Denver. At this point I wouldn’t be able to find a place to rent that is as cheap as my mortgage.

    I have a number of British friends who are based in London and several of them have purchased homes and it is quite frightening to me the amount of money they spent on the property and having to adjust their mortgage every 2 years. I am also concerned because I have a friend who owns 1 property in London and she and her husband are about to purchase another one in Hitchim(?) I think they will be at risk if one of them loses a job because they are keeping her property in London. She had to do some strange paperwork in order to get that first property…because she couldn’t really afford it. I’m keeping my fingers crossed for them and am hoping all will be ok! Finding a 1st home in England would be a stressful and nerve wrecking process even for those with great incomes/credit.

    1. Michelle – you are so lucky to get a nice property only 1.5 times income and spending 15% on accommodation sounds like a dream to us on this side of the pond.

      Over here the game is to remortgage every so often as there are ‘good deals’ available but these are generally better for larger mortgages. Most British mortgages are variable interest rate so when the interest rates go up – maybe next year – many people will find their payments will increase.

      I concluded some while ago that buying (or keeping) property for rent may sound attractive but is only so if you are prepared to play the long game. Keeping a single property may not be so bad as your friend will already have repaired it etc but investing in property when there is the possibility of a lot of new housing and/or rent controls is not a good idea. In addition, rentals depend on property price inflation because rents follow prices and as I have shown, these are already too high for most people. And it’s Hitchin BTW, just north of London. Nice spot but expensive, as is most property there.

  5. I’m 26 and I currently see no way to get on the housing ‘ladder’ (I wouldn’t even necessarily want to move on, just owning one property and staying in it forever would be enough for me). Help to Buy scares me, I’m only just beginning to save after paying off university debt and getting established in my job (so I probably don’t have 0.1% let alone 5%+ deposit), so right now owning my own home is an impossibility. What scares me is that if I can’t do it now, when will I ever be able to do it? I feel like the amounts I will need for deposit/earnings so I can be approved for a mortgage will ALWAYS be out of my reach as the market runs away without me.
    Another concern is that I’ve avoided loans and credit cards like the plague and only have a small student overdraft, so my credit score is probably not at an acceptable level to get a mortgage. I don’t like to idea of borrowing, and I know I’m going to have to do this in order to build up a decent enough score for a mortgage one day. I don’t like feeling that I have to go way out of my comfort zone and owe so much money to corporations simply because I want a secure home for my future. My parents were so lucky.

    1. OK @Coral. My heart goes out to you and all young people who have done the ‘right thing’, got an education with associated loan and found a job. The legislators who have got us all in this position of course benefited from no tuition fees and student grants.

      But let’s look at the positives. You have a job, which is a lot better than many of your contemporaries. Well done! Nothing is worse than studying to find that no-one wants your knowledge and skills.

      There is no time like the present to start planning.

      It would be a good idea to get a credit card and pay it off every month (so it becomes effectively a charge card) because that puts you on the radar. Just use it in the supermarket. Nothing scares a lender more than finding you have no credit history.

      There is nothing intrinsically wrong with borrowing. Just keep it under control. You are lending time to your employer every month as you are presumably paid monthly in arrears. Everyone borrows at some stage and showing that you have borrowed and paid it back is the only evidence that lenders accept.

      The thing about Help to Buy is that it will be limited in time although the end date is not finalised (I have read that the mortgage guarantee scheme will end in Dec 2016). So while it may cause a property price bubble, your options are either to rush and try to find 5% in the next year or so which may be difficult or impossible, or buy after the scheme ends when the prices may drop a little or at least stabilise but that depends on what if anything follows so is rather a gamble.

      Going into H2B does constrain you – not all mortgage providers (or builders for the equity scheme) are involved and there are terms and conditions. It may be better to save as much as possible now and hope that 95% mortgages return. I have seen 85% and 90% mortgages without H2B.

      If you buy wisely and the particular house appreciates in value, a few years down the line you can then remortgage to get a better deal.

      But paying rent is really dead money – you are paying someone else’s mortgage in the end if they have one at all. The main advantage in renting is flexibility if you need to move.

      There is always the possibility of increasing your income. At 26 you haven’t reached your peak earning capacity yet so don’t panic…. !


  6. To get into our first home we saved for a down payment but living in what is essentially a pretty bad area of town (not dangerous, though). I worked more than one job and my fiance worked a lot of overtime. It paid off as we bought a house in a desireable area when the market was on the downswing (we got it for a great price) and it has a suite so we get some rental income, too.

  7. Well done! But it took quite a bit of work in the early days. The problem over here is that everything hangs on house price – it perverts the way we look at things.

    It is nice when the house price appreciates so much you can afford that holiday home merely by extending a mortgage but that is a bit of an illusion really – you are still extending your mortgage and the only way to cash this in may be to downsize when you are older.

    1. Yup. Even the Chancellor says it will take at least 10 years to get the supply and demand into balance. Of course there is many a slip t’wixt cup and lip.

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