First-timers can unlock the chain

As lenders scramble to kickstart the market, now is the time to drive a good deal. Here and on pages 16 to 17 we examine the options for borrowers

One of the keys to a recovery in the housing market is the return of first-time buyers.

There is no doubt that these people will find buying a home more affordable than it has been for a long time. The TSB Affordability Index shows that the average buyer will spend pounds 25.70 on a mortgage out of every pounds 100 of take-home pay. It is the lowest the index has been since 1978. The comparable figure in 1990, when mortgage rates were very high, was pounds 71.30.

But it remains open to question whether this will be enough to lure back first-time buyers, whose number declined by about 40 per cent between 1988, the peak of the boom, and 1995.

First-timers play a key role in the housing market; they are the source of initial demand. If they disappear, there is a fall in second-time buyers because of the way that chains develop in the market.

Demographics explain a small part of the decline of first-timers: there are fewer people in the 20 to 24 age group than there were eight years ago. But demographics are not the whole story.

"The main reason is that people who would have bought previously have chosen either not to form households and have stayed in the family home, or they have decided to rent," says Paul Sanderson of the Nationwide Building Society. "We have seen an increase in the average age of first-time buyers."

There is as yet no hard evidence that first-time buyers are back, but their return is needed.

The housing market has improved modestly since last autumn in terms of prices, the number of transactions and the number of mortgage approvals. But there is a long way to go before it will be possible to detect a sustained recovery. Transactions in England and Wales as measured by the Inland Revenue were just over 1.1 million in 1995. The peak for transactions was in 1988 - 2.1 million. Then came the collapse and in 1992 there were 1.1 million.

A modest pick-up to 1.2 million in 1993 and 1.3 million in 1994 raised hopes that the worst was over, but then came the setback in 1995.

Blame for this is put on big tax increases and the expectation of interest rate rises. In addition, the decline in tax relief through Miras and changes in help with mortgage interest payments for people on income support helped to damage confidence.

Current factors likely to boost confidence are the tax cuts feeding through this month and a better interest rate environment - mortgage rates are the lowest for 30 years.

"Confidence is very important. It has been very fragile but we are beginning to see it improve," says Mr Sanderson. "Once a view gains ground that sharp falls in house prices are over and they are on an upward trend, people who have been thinking of buying a property will see there is now no reason for delay. This will encourage first-time buyers to come back into the market."

And for first-time buyers, there is more good news: they can leapfrog the bottom of the market. A first-timer in 1988 might not have been able to afford much more than a small one-bedroom flat. The equivalent buyer today might be able to buy a modest terrace house or even a semi-detached.

Unfortunately, this is bad news for some of the people with small properties, who often have the greatest amount of negative equity. Shifting their home at a price they want could be very difficult even if the market recovers. First-time buyers tend to buy the best they can afford.

Our table of best borrowing rates on page 19 provides details of some of the most attractive deals currently available for first-time buyers.