Ailing housing market needs shot of new blood

First-time buyers hold the key to rejuvenating property prices, but ministers and lenders have to do more. Chiara Cavaglieri and Julian Knight report

The most authoritative survey of UK house prices – compiled by the Land Registry – paints a pretty stark picture. House prices have been falling for the past five months and now sit lower than they did a year ago. What's more, the number of sales is at a level last seen during the depths of the financial crisis of 2008. Restrictive mortgage lending (Lloyds lowered the loan to value – LTV – ratio on many of its mortgage products last Wednesday) and economic uncertainty all play their part in the continuing house price slide.

Property experts say there is only one way out of the market morass: getting the number of first-time buyers – again approaching record lows – back into the property market.

"First-time buyers are the essential building blocks of the housing market," says Samantha Baden, a property analyst at Findaproperty.com. "Unless we have a steady supply of new first-time buyers coming into the housing market, there's a domino effect on every further link in the property chain. Liquidity dries up and the number of transactions slows down."

The drop in first time buyer numbers is stark. In 2000 there were 500,000, last year just 200,000. A report from HSBC last week concluded that house prices would have to fall 43 per cent to restore the same price to earnings ratio as was prevalent in 2000. The reports also slammed Government-sponsored shared equity schemes as "woefully inadequate". No wonder, according to the land Registry sales of £150,000 to £200,000 homes are down 45 per cent from December 2009.

House price declines have done little to attract new homeowners, with the number of first timers falling by 13 per cent in the past year, according to the Council of Mortgage Lenders. Lenders are still demanding daunting deposits and net mortgage lending, after repayments fell last year to £8.15bn – the lowest level since the Bank's records began. More and more young would-be homeowners are now forced to rent or live with their parents until things pick up.

"Many with student loans outstanding or expensive lifestyles are finding it impossible to save the minimum of 10 per cent deposit to buy a property on their own," says Helen Adams of FirstRungNow.com. "Lenders are being particular about who they lend to, which is to be expected with the jobs market being rather insecure."

With first-time buyers all but locked out of the market and the knock-on effects taking their toll, the industry is trying to work together to find a solution. In the Budget, the Government unveiled the new FirstBuy scheme which will be available for one year to first timers looking to buy a new-build property. Buyers have to cover a 5 per cent deposit while the Government and house builders stump up 10 per cent each as an interest-free loan for five years. This brings buyers up to the 25 per cent lump sum needed to access the best mortgage rates. While it has been cautiously welcomed by many, the scheme is set to benefit only 10,000 people, raising criticism that more needs to be done.

"Landlords are buying one- and two-bedroom properties which keeps the prices up. I'd like the Government to have done more to disincentivise this practice as it keeps the first-time buyers out by inflating the prices at the bottom of the market," says Ms Adams.

The abolition of stamp duty for first timers on properties up to £250,000 has been a help. Shared ownership has also been around for about six years and enables them to buy a share of a property with a small deposit, taking the mortgage in conjunction with a housing association. There's also a rent-to-buy scheme allowing social tenants to fix a property price and pay reduced rent until they save enough to buy a proportion of that property on a shared ownership basis.

A few lenders have their own facilities in place. Lloyds has the Lend a Hand scheme which enables first-time buyers to put down a deposit of 5 per cent, with "Helpers" (usually parents) putting up their savings, worth 20 per cent of the property value, as security. The mortgage is fixed for three years; afterwards, helpers can in theory get their money back – although this is only if the buyer doesn't default on payments and the mortgage has reduced to 90 per cent or less of the property's value. Lloyds is also working with local authorities to offer "Local Lend a Hand" which follows the same model but with councils providing 20 per cent security.

For parents unable to stump up the cash, National Counties offers a similar model; the Family FirstGuarantor mortgage allows first timers to borrow up to 95 per cent by using their parents' spare equity as guarantee. "Again the lender is looking to lower the risk by taking additional security but instead of parents providing a lump sum, they are using the equity in their home as collateral," says David Hollingworth of London & Country, a mortgage broker.

Otherwise, a parent can act as guarantor directly, promising to cover the mortgage each month if anything goes wrong. The Mortgage Works is the big player here, offering a whole range of guarantor loans including a two-year tracker at base rate plus 3.09 per cent, with a 1 per cent fee, for buyers with 80 per cent LTV.

House builders are also coming up with initiatives. Persimmon's Parent Payback scheme allows parents to contribute up to 20 per cent and earn 5 per cent interest for five years. A similar deal is available from Bovis called Jumpstart, and Barratt Homes and Hitachi Capital have teamed up to offer unsecured loans charged at 5.4 per cent APR (typical) worth up to 15 per cent of the purchase price, up to £50,000, to parents of first timers.

Some of the more generous standard first-time-buyer mortgage deals include a two-year fix at 4.99 per cent from Yorkshire Building Society, and a five-year fix at 5.89 per cent from Britannia/Co-operative both with a £1,995 fee and available at up to 90 per cent LTV. Skipton also has a two-year fix at 6.49 per cent with a £195 fee, at up to 95 per cent LTV.

Others argue, however, that the solution is far more straightforward – bide your time and save up for a bigger deposit. "Sadly, the most sensible way to help first time buyers is to stop interfering in the market, allow prices to fall back to affordable levels and for buyers to re-enter the market when they can afford to do so," says housing expert Henry Pryor. "With average prices falling for six consecutive months, it would be irresponsible to encourage property virgins into the market."

Expert View: Helen Adams, FirstRungNow.com

"Without first-time buyers there is no property market. Unless the bottom of the chain is active, nothing happens further up the property chain, and the whole market is stifled except for those buying second properties to rent out or holiday homes."