Category: Housing Market

Categories

Will it ever get better for first time buyers?

Over the past year we’ve seen tens of thousands of people lose their jobs. We’ve seen businesses up and down the country cease trading and we’ve seen enough uncertainty to last most of us a lifetime. 

At the moment the forecasts are that the UK economy will be back to pre-Covid levels by the second or third quarter of next year – assuming, of course, that there is no ‘third wave’ of the virus next winter. 

With all that going on – with the UK at one point facing the deepest recession for 300 years – there is surely one certainty in the financial world: house prices must have declined last year. Surely, at last, more first time buyers than ever must have had a chance to get a foot on the housing ladder. After all, there wasn’t just the pandemic, there was also the uncertainty of Brexit…

In fact, the opposite happened. Nationwide’s House Price Index for March showed that house prices were up 5.7% on a year-on-year basis, with the average house in the UK costing £232,134. After a year of lockdowns, house prices were still rising. 

For first time buyers – young people looking to get a foot on the housing ladder for the first time – rising prices over the past year must have come as a real blow. In fact – with young people the demographic most likely to have been affected by the pandemic in the jobs market – it has been the proverbial ‘double whammy.’ 

So is the position for first time buyers likely to improve? 

There are some grounds for optimism. The Chancellor’s stamp duty holiday is due to end on September 30th. As a consequence, the Office for Budget Responsibility expects house prices to fall by 1.7% next year. The forecasting organisation Oxford Economics, however, is suggesting that the fall will be between 4% and 5% in 2022. 

Will that be the case? Some pundits believe that as the housing market has stood up to the pandemic reasonably well, it will do even better as the economy starts to recover.

There are also regional factors to take into account. Many people have used the period of lockdown to reassess their lives and where they want to live. The BBC recently reported an ‘explosion’ in demand for property on England’s south coast and on the Welsh coastline. First time buyers in these areas are likely to face competition from people buying second homes or relocating from cities and downsizing. 

The Chancellor sought to give first time buyers a further boost in his March Budget, with the mortgage guarantee scheme providing government backing for 95% loans on both new builds and existing homes. But as the economy ‘bounces back’ first time buyers may need further help still in order to find a foot on the housing ladder. 

Sources
https://www.cityam.com/uk-set-for-very-rapid-growth-over-next-quarters-says-boes-broadbent/

https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/2021/Mar_Q1_2021.pdf

https://www.cityam.com/house-prices-new-build-homebuyer-demand-explodes-on-englands-south-coast-and-in-wales/

What will 95% mortgages mean for potential first time buyers?

At the virtual Conservative Party Conference on 6th October, Prime Minister Boris Johnson gestured towards a plan in the pipeline to introduce 95% Loan To Value mortgages in an attempt to reinvigorate home ownership and in his words, “help turn generation rent, into generation buy.” 

While the details of this plan remain unclear, the PM declared that there were up to 2 million potential homeowners who would be able to afford repayments but do not currently have access to a mortgage. His proposed solution is to give young, first time buyers the option of fixed rate, long term loans of up to 95% of the value of the home.

Why is this new?

Up until the pandemic, there were many lenders who were providing 95% LTV mortgages, albeit generally requiring a guarantor. Due to the economic uncertainty and job insecurity accelerated by COVID-19, those lenders have chosen to rescind these products which require lower deposits. The result of this is that would-be first time buyers who have been saving for their first home, no longer have a large enough deposit to secure their mortgage.

The lenders, then, will need good reason to return these low deposit mortgages to their offering. The PM has suggested reducing the ‘stress tests’ that have been in place since the 2008 financial crisis, meaning would-be buyers would have to tick fewer boxes to be considered eligible and able to afford repayments.  

This relaxing of stress tests exposes the lenders to a risk of bad debts, should the economy take a downturn. To combat this, the PM has suggested a state guarantee to lenders. This would most likely come in the form of underwriting the debt; with the average home in the UK costing £220,000, underwriting 10 per cent of a deposit for 2 million buyers would leave the government and the taxpayer liable for £44billion.

The potential knock on effects

A side effect of the temporary reduced rates of stamp duty and the subsequent inflated house prices is that first time buyers are currently hesitant to commit to high LTV mortgages, where they are able to. They fear that they’re at risk of finding themselves in negative equity upon the return of full rates of stamp duty, and the possibility of reduced property value that may come with it. With reduced checks to validate who’s eligible for these mortgages, we could also see a larger portion of new buyers unable to afford their repayments, turning generation buy into generation foreclosed. 

While the state guarantee to lenders could incur a potential risk of £44billion of the public purse, experts believe this to be a high end estimate, and unlikely in practice.

95% LTV mortgages were available before the pandemic, and yet owning a home remained a pipe dream for many. Why this would be different now is up for debate, but time will tell.

Sources

https://www.thisismoney.co.uk/money/mortgageshome/article-8810561/How-Prime-Ministers-plan-offer-95-mortgages-work.html

https://www.ftadviser.com/mortgages/2020/10/06/industry-cautious-about-pm-s-95-mortgage-plans/

House prices have rebounded, but is it a “false dawn”?

At first glance, recent figures from the housing markets appear wholly positive. During July, Nationwide reported a 1.7% leap in prices. 

However, the country’s largest building society warned of a “false dawn” when they announced these figures. They highlighted that much of the rise can be attributed to pent up demand and people deciding they want to move after being confined at home for several months.

Nationwide said that if redundancies continue, the market could slow down later in the year. Their general message seemed to emphasise that we’re not out of the woods yet. 

The property market has had a busy few months since it was released from lockdown restrictions in mid-May. Across the country, lenders and estate agents have reported a flurry of demand which was further fuelled by the Stamp Duty holiday announced by Rishi Sunak in early July.

Nationwide’s research showed that the average price of a UK home in July had risen to £220,936, higher than in June, but still below April’s figure of £222,915. Overall, prices have fallen by 1.6% over the past three months. 

The positive news is that activity has actually recovered far more rapidly than many had previously expected. Some feared that physical distancing measures would temporarily derail the housing sector.

However, when it comes to the long-term future, Nationwide took a restrained tone, unsurprising since most forecasters expect the employment situation to worsen over the next few months. This could have heavy ramifications for the housing market.

Property giant Savills echoed Nationwide’s cautious tones. It said the market had been more robust than expected but urged caution when reading the figures. 

Lucian Cook, Head of Residential Research at Savills, said: “The market is currently being driven by those with the security in their household finances to be able to act on the lifestyle changes and desire for more space that the experience of the lockdown has brought about.”

According to Savills’s analysis of the property market, there has been a strong sales bounce for homes worth more than £500,000 since the end of lockdown. However, at the other end of the market, sales numbers were taking far longer to recover and could be hit later in the year as the furlough scheme comes to an end. 

Although there are positive signs, further price falls remain very much a possibility as pent up demand cools off and unemployment creeps up.

Sources
https://www.theguardian.com/money/2020/jul/31/nationwide-warns-of-false-dawn-after-uk-house-prices-leap

Stamp duty’s been slashed! Is it worth buying a holiday home to let out when you’re not there?

On 8 July, Chancellor Rishi Sunak announced a cut to stamp duty that could save holiday home buyers up to £15,000 if they complete the purchase before 31 March 2021. The government raised the threshold on stamp duty to £500,000, in a move to restart the stagnant housing market. 

Second home buyers will still have to pay the additional stamp duty surcharge at a rate of 3% for properties up to £500,000. For properties over £500,000, you would have to pay 8% rate of stamp duty up to £925,000. This figure includes the second home surcharge.

With a ‘staycation’ likely to be as much as most holidaymakers feel comfortable taking this year, it’s not surprising that demand for holiday lets has surged, meaning buyers could profit from letting out their property when they’re not there.

All this seems to make the prospect of buying a holiday property rather tempting. But is now the best time to buy?

Data from cottages.com shows that queries from investors wanting to buy holiday lets are already up 25% since Sunak’s statement.

What’s more, demand for such properties was already surging because of the fact that most Brits will holiday at home this year. Unsurprisingly, coastal areas like Cornwall have seen the highest rise in interest. 

Paul Le Blas, Regional Director of Millerson estate agents across West Cornwall, says his firm has done as many deals in the six weeks since markets reopened as it usually would in three months.

In holiday hotspots, it’s very much a seller’s market. There are reports of people making offers even before viewing properties and houses selling for as much as 7% above asking price. 

Despite forecasts that house prices could fall by as much as 5% this year, experts believe that holiday lets and second homes are outperforming the rest of the market and prices could even increase because of the extra demand. 

Now could be a good time for buyers to get in the market before prices increase any further.

At the moment, holiday let owners can take advantage of tax breaks no longer available to buy-to-let landlords. 

As of this financial year, buy-to-let investors will no longer be able to deduct the interest they pay on their mortgage from the rental income they declare to HMRC. 

However, holiday lets are still classed as a business rather than an investment, so holiday-let owners can continue to deduct their mortgage interest from their rental income.

Sources
https://www.thisismoney.co.uk/money/news/article-8522353/Britons-buy-holiday-homes-cash-rise-staycations.html

https://www.zoopla.co.uk/discover/buying/q-a-new-3-stamp-duty-surcharges/

How can millennials get on the property ladder?

There’s been a lot of talk in the press recently about generational inequality, which has mostly been with good reason. Those currently in their twenties and thirties are earning far less than people the same age did 10 to 15 years ago.

The 2008 recession has put the millennial cohort far behind in terms of earnings and wages. Wages have never fully recovered since the recession and are still behind their pre-financial crisis peak. Many may be unable to ever afford to get on the property ladder, meaning they will have a lifetime of rent payments to fund.

Also, rising house prices have meant that the average deposit has risen from around £10,000 in the Eighties and Nineties to between £50,000-60,000 today, according to analysis by accounting firm PwC. Even when adjusted for inflation, the rise is dramatic.

Auto-enrolment in pension schemes has begun to address some of the long term issues around retirement funding but even still, these do not compare to the security offered by ‘gold-plated’ direct contribution schemes.

The younger generation are already aware that they will have to work far longer. Early retirement will likely be the premise of the rich, lucky or extremely frugal. Fortunately, millennials look set to be able to cope with the demands of a longer working life. The younger generation are fitter and healthier compared to previous generations with far fewer smokers and better diets.

Although a longer working life might be a path towards an eventual retirement, it does little to help young people get on the housing ladder. The fact of the matter is that many young people will need some kind of ‘leg up’ if they are to achieve the financial stability that many of the ‘baby-boomer’ generation managed.

The income gap between older and younger generations means that many young workers will have to rely on the wealth accumulated by their parents and grandparents if they are to sustain the same quality of life.

Family loans have become increasingly important for the financial wellbeing of young people. Many are giving younger generations so-called ‘early inheritances’ in the hope that such loans will enable them to get a foot on the property ladder. This is already so widespread that nearly eight out of 10 first-time buyers in London are receiving some sort of financial help from their parents.

Parents and grandparents are funding help through a variety of means. Almost three quarters of parents used their life savings to help out with the cash, while a third downsized or released equity from their homes. Another third accessed pensions cash; either cashing in lump sums through income drawdown or annual annuities. 7% remortgaged and 6% took out a loan themselves.

This image has an empty alt attribute; its file name is strap-landscape.png

Sources
Sunniva Kolostyak “Fireworks for millennials” in Pensions Age, November 2018
https://www.telegraph.co.uk/personal-banking/mortgages/baby-boomer-vs-gen-y-homebuying-in-1982-compared-to-2016/

UK properties slower to sell than a year ago

property pricesThe housing market has slowed down significantly. The Royal Institution of Chartered Surveyors (RICS) has reported that whereas last year a home typically took 16 weeks to be sold, the average time is now about 18 weeks. June was the 16th successive month of decline.

While people may be experiencing difficulties in selling their houses, the flip side for those buying a property is that house prices haven’t been rising. This is good news for first time buyers in particular.

According to the Halifax, the UK’s largest mortgage lender, in the year leading up to June 2018, house prices rose at their slowest pace since March 2013 with an increase of 1.8%. The Office for National Statistics reported that annual house price growth fell to 3% in May compared with a month earlier. London property values were responsible for dragging down the rate of growth across country, which was the fourth month in a row of falling house prices for the capital. It was a more positive story for the East Midlands which showed the highest annual growth with house prices increasing by 6.3% over the last year. The slowest increases in house prices were in the north-east of England with prices rising by just 1.3%.

The report also showed that the number of properties estate agents had on their books was at an all-time low. The market appears to be reaching stagnation point. It’s not just properties for sale that are affected either. The rental market is affected too, with many landlords abandoning it as a result of tax changes, such as the stamp duty surcharge. This has hit buy-to-let investors and second-home owners particularly hard.

Simon Rubinsohn, chief economist at RICS, commented that, “It is hard to see what is going to provide much impetus for activity in the housing market in the near term.”

There has been speculation by analysts of a potential interest rate rise this summer. This has contributed to an increase in the number of mortgages being processed. According to UK Finance, the number of new home loans hit its highest monthly total in May. Estate agents feel, however, that this would just have an even more negative effect on the already fragile confidence that exists in the market.
Sources
https://www.bbc.co.uk/news/business-44794225
https://www.theguardian.com/money/2018/jul/18/uk-annual-house-prices-rising-at-slowest-rate-for-five-years-ons