17th July 2013
The Council of Mortgage Lenders has been analysing the dramatic 42% increase in first time buyers. In a paper issued this week, the trade body suggests that some of this group may be ‘returners’ i.e. those who were not owner occupiers when they took out the mortgage, but who have decided to buy again.
The trade body says that the impact of the end of the stamp duty holiday in March last year should have had its biggest impact on year-on-year comparisons for March and April though there may have been some overhang for May. However when this factor is taken into account, there is still a rise.
“If we compare the total number of loans advanced to first-time buyers in the first five months of this year with the same period last year (which should remove any stamp duty related impacts), our data shows an 18% increase. So, there is no denying that first-time buyers appear to be staging something of a comeback”, the report says.
Some of the increase may have come about because first time buyers have had to find a smaller deposit with the average loan to value increasing from 81% to 83% suggesting that deposits may be smaller.
The CML says that the market has also seen a gradual increase in number of first-time buyers able to buy without financial assistance.
“We estimate that, in the first two months on this quarter, 42% of first-time buyers were able to buy without being helped with their deposit, up from 37% in second quarter last year and from a low point of around 30% in the second quarter of 2009 (when the average deposit was 25%).
“So, some first-time buyers are buying with a slightly smaller deposit – and are therefore likely to be able to do so without help. But this is not a sudden shift happening in the last month, and deposits do still remain elevated by historical standards.”
The report says that “first-time buyers have also typically been taking out larger loans – with this upward trend becoming more pronounced since the start of this year. In May, the average first-time buyer borrowed £113,400 – up from £109,600 at the end of last year”.
The CML notes that an increasing proportion of first-time buyers have borrowed between £100,000 and £200,000, and between £200,000 and £300,000, while the proportion of those borrowing less than £100,000 has fallen over the last year.
At £35,700, the average first-time buyer income has reached a record high but the CML does not think incomes are increasing out of step with the UK.
It says there hasn’t been a shift to more sales in expensive regions such as London, nor any particular increase in age which could see average incomes rise though more of the first time buyer group are buying with joint incomes.
“The average age of a first-time buyer has remained remarkably stable at around 29, though there have been some changes around the age limits for example with 26% of first-time buyers aged over 35, compared to 23% in the same period last year.
“An increase in average first-time buyer incomes may also reflect an increase in the number of ‘returners’ captured in our data, as we noted earlier. ‘Returners’ are likely to be slightly older than other first-time buyers, and may therefore have slightly higher incomes.
The CML concludes that with first-time buyer incomes increasing and mortgage interest rates falling, first-time buyer loans on average have remained more affordable than a year ago, despite the increase the amount borrowed. For the first-time buyers who purchased in May, mortgage payments (including both capital and interest) consumed an average of 19.3% of income, down slightly from 19.6% in May last year.
It also says an increasing proportion are choosing to fix their loans.
“In May, 93% of first-time buyers – the highest proportion we have ever recorded – opted for a fixed rate, with longer term fixes (in particular, for four or five years) becoming more popular. Fixing their rate reduces the risk of payment shock for these borrowers for some time”.
However it points out that this relatively benign environment may not persist.
“While the affordability of current borrowers appears to be manageable, for many potential buyers housing affordability pressures are still an issue. First-time buyers may now be able to purchase with a smaller deposit, but there are two key elements affecting the ability to buy a home: the size of deposit required and the on-going capacity to service the loan. Fixing the deposit constraint will not fix the on-going affordability constraint, and we may see the scales tip back to the pre-crisis position – when it was the relationship between house prices and income that posed the biggest problem.
“If house prices continue to rise and income growth remains subdued, owning a home may move out of the reach of increasingly more people. The mortgage market is clearly open for business, but it is crucial that housing supply increases to ensure that affordability does not become an insurmountable hurdle for current and future generations of first-time buyers.”