Rob Budden: First-timers raid the family coffers

It’s very early days to start extrapolating long-term trends – and a great deal could still wreck the party – but in some areas at least it looks like the property market has got off to a reasonably strong start this year. But even if prices move little from where they are now, things are still tough for first-time buyers.

According to the Halifax, it now takes almost five years for a typical first-time buyer to cobble together the money for a deposit.

Little surprise then that the average age of the first-time buyer is now 34. A decade or so ago, the typical buyer was in his mid to late-20s when he bought his first property.

And, as we all know, property prices have risen much faster than earnings over the past decade, partly helped by the low and relatively stable interest rate environment. The average property in the UK now costs 5.6 times average earnings – a record high – and well above a long-run average of 3.7.

Yet, despite all this, having stayed away for several years, it appears that many first-time buyers are coming back to the market.

So how are first-time buyers managing to get back on to the property ladder? There are a number of clues out there.

The most interesting factor in my mind is that greater numbers of first-time buyers are getting financial help from their family. According to a study by the Council of Mortgage Lenders, last year between 40 and 50 per cent of first-time buyers aged under 30 were getting help from their parents. This compares with just 15 to 20 per cent of under-30s in 2000 and just 5 to 10 per cent in 1995.

What’s more, these buyers are being given more money than ever before. In 1995, the average deposit of first-time buyers who received some financial help was £12,950 or around one year’s salary. Last year this had grown to £34,200 or almost one-and-a-half times the salary levels of these buyers.

The most likely explanation for this sharp increase is that many parents and other benevolent family members are tapping into their own housing wealth to help offspring get on to the property ladder. In simple terms, they are preferring to pass on some of their wealth while they are alive, rather than see much of it get eaten by tax when they die.

But there are other factors at work. Even with such help, first-time buyers are having to take on significant levels of debt to get on to the ladder. And those who can only muster up much smaller deposits are even more financially challenged.

This is where the lenders have been stepping in, offering mortgages based on much higher multiples than in the past and often requiring minimal or no deposits.

Last year Northern Rock’s Together mortgage, which is very popular with first-time buyers, took in a whopping £7bn of net new lending. This is around 15 per cent of the total amount lent to first-time buyers last year.

So what has made this mortgage so popular? First, it allows buyers to borrow up to 95 per cent of the value of the property on a secured mortgage and up to a further £30,000 in the form of a personal loan – this loan is capped at 30 per cent of the property’s value – at the same interest rate. In effect, subject to a healthy credit check, this gives cash-strapped buyers a decent slug of cash to kit out their new home.

Further, its loan criteria are also very generous. Traditional loan to income multiples have been around 3.5 times salary. On Northern Rock’s mortgage someone with a low credit score who is earning less than £25,000 a year could borrow up to 4.4 times their income. And someone earning more than £100,000 a year with a good credit rating could get a mortgage of up to 5.9 times.

Depending on your point of view, this is either an example of banks reacting to consumer demand or it is reckless lending. In its defence, where buyers borrow right up to their income multiple limit, Northern Rock insists they take out either a five or seven-year fixed rate deal, reducing risks of arrears by giving them certainty of repayments over a decent period of time.

Finally Savills, the mortgage broker, reports strong growth in guarantor mortgages, which is also allowing first-time buyers to secure more expensive properties.

Personally, I am sceptical there is much steam left in the housing market. But if lending practices such as these continue to become more mainstream, property prices could have a little further to go before they plateau.
rob.budden@ft.com