The latest research conducted by Zoopla has found that first-time buyers (FTBs) have become the largest group of home buyers in 2019.
Zoopla analysed the changing trends and difficulties associated with home ownership facing FTBs. In particular, the company examined the effects of higher property prices, stricter mortgage regulations and affordability testing which, although intended to prevent households from becoming over-indebted, create additional problems for would-be buyers.
The study concludes that because of the challenges facing FTBs when buying their first home, they are taking a longer-term view and opting for three-bedroom properties that will accommodate them for longer as their households grow.
There is no evidence to suggest that FTBs are choosing smaller, lower value homes such as flats and starter homes in order to gain a foothold on the property ladder.
The number of housing purchases the FTBs have made has increased by 85% since 2010 according to UK Finance. This includes all other buyer groups such as existing mortgaged owner, cash buyer and buy-to-let purchaser.
Richard Donnell, Research and Insight Director at Zoopla, commented that FTBs have driven the housing sales market across the UK in recent years, due to lower mortgage rates and improved mortgage availability. The desire to own their home remains strong among FTBs despite obstacles such as high house prices in the south of the UK and stricter mortgage regulations.
Growth in the FTB sector is expected to be highest in regional markets where affordability remains attractive and there is greater availability of higher loan-to-value mortgages.
Deposits remain the greatest barrier
The amount of the deposit, averaging around 15% of the value of a property, is still one of the greatest barriers to home ownership and is double the average level of deposit which pertained before the global financial crisis. 14% of all FTBs have used schemes such as Help to Buy which aim to support those with small deposits.
In addition, FTB sales are being supported by the increasing availability of higher loan-to-value mortgages at or more than 90% which reduce the amount of deposit required.
Stricter mortgage regulations
Zoopla also examined the effect of new mortgage regulations intended to prevent households from taking on too high levels of debt while mortgage rates remain historically low. An FTB considering the purchase of a house will find that the monthly cost of mortgage repayments at the ‘product rate’ will be less than the average rent for the same property.
Nonetheless, the buyer has to prove to the bank they can pass an affordability test in order to obtain the mortgage. This involves paying a higher ‘stressed’ mortgage rate to ensure they can afford to pay an increased mortgage rate. And while the stressed rate is often closer to 7%, the typical product rate is currently around 2%.
For example, an FTB in London or the rest of the UK would need an income of £53,000 and £20,000 respectively to buy a property, based on a mortgage product rate of 2.4%. But paying a stressed rate, the FTB would need an income of £92,000 in London and £36,000 in the rest of the UK.
Donnell commented that it is not only high house prices and large deposits that FTBs have to wrestle with in order to buy their first home. Mortgage regulations introduced after the global financial crisis to prevent households becoming over-indebted by means of affordability testing create an additional obstacle.
FTBs have two options to overcome affordability criteria: taking advantage of the increasing availability of high loan-to-value mortgages or concentrating on buying smaller, less expensive homes.