First-time buyers 'frozen out of market for years'

FIRST-TIME buyers will be frozen out of the housing market for a generation unless house prices slump dramatically.

That's what housing market experts are now predicting, as a combination of restricted lending, low savings rates and a proposed regulatory crackdown raise the barriers to home ownership even higher.

The average Scottish first-time buyer had to find 15,016 more for a deposit last year than in 2007, according to property data group Hometrack, as a two-tier market emerged in Scotland where only affluent buyers or those with generous parents could access the market.

The difficulty for first-time buyers is that while prices have so far fallen only modestly, the average deposit requirement has soared.

Mortgages needing a 10 or 15 per cent deposit are available but for much of the past year the average first-time buyer has put down a 25 per cent deposit. Scots buying their first home put down 24,573 on average last year, compared with 9,738 two years ago, according to Hometrack.

A research paper commissioned by insurer Genworth Financial has estimated that 100,000 first-time buyers were prevented from getting on the housing ladder last year because of the restricted availability of low deposit mortgages.

Angel Mas, president of mortgage insurance Europe at Genworth Financial, said: "The estimation in this paper that this is a situation that could take decades, not years, to recover raises real concerns that a whole generation may be excluded from getting a foot on to the housing ladder."

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Robert Carroll, solicitor and managing director of MOV8 Real Estate in Edinburgh, believes the difficulty of saving a deposit sufficient to secure a decent mortgage rate is currently the biggest barrier to first-time buyers getting on the ladder.

Those with deposits of just 10 per cent continue to pay significantly more for their mortgage than those with greater sums to put down.

The average 90 per cent loan-to-value mortgage is currently 5.97 - down from 6.48 per cent in April - compared with the 4.02 per cent average offered to buyers with 25 per cent deposits.Yet the average first-time buyer is putting down a deposit of more than 20 per cent, with some lenders turning down up to nine in 10 applications for 90 per cent LTV deals.

Carroll pointed out that a buyer putting down the average 25 per cent deposit in Edinburgh, where the average property cost around 200,000, would need to stump up 50,000.

Even at the lower end, the average first-timer buying a 100,000 flat in a non-prime area of the capital would need around 25,000, based on current deposit requirements.

"It means that home ownership will be something that is open only to people who have been saving for several years or for people buying with someone else," said Carroll.

And the outlook for first-time buyers could get worse. The Financial Services Authority (FSA) wants to introduce strict affordability tests for borrowers and limit interest-only deals to the extent that experts believe they will become extinct, making it more difficult for buyers with imperfect credit histories to secure mortgages.

The CML has warned that if the proposals had been in place earlier, six in 10 mortgages granted to first-time buyers between 2005 and 2009 would have been rejected, even though 95 per cent of those borrowers have not suffered any repayment problems.

If the FSA does get its way, first-time buyers will have to hope for either a sharp slump in house prices, a change in lender attitudes, or both. If prices rise only with inflation and lenders don't ease their criteria then many first-time buyers will remain excluded from the market, said Carroll.

"If lending conditions improve and banks start lending again to people with 10 per cent deposits then a couple of years of hard saving for somebody with a good salary should allow them to save up a deposit."

Similarly, he added that if house prices fall behind the general rate of inflation they will become gradually more affordable. "On the other hand, if house prices start rising at a rapid rate again and ahead of inflation, which is unlikely, then the affordability issue will become more of a problem."

Carroll wants lenders to make decisions based less on rigid multiples of salary and more on general affordability, in a way that helps prudent first-time buyers who nevertheless are unable to stump up the eye-watering sums required for a deposit.

"Everything, however, depends on the two questions that we can only speculate about: will house prices rise or fall relative to general inflation and will lending conditions for property buyers improve or deteriorate?"

David Morrans, director of Honour Financial Planning, believes house prices are around 30 per cent too high, given the current stagnant wage inflation and job concerns.That means that the current downward trend needs to continue if more first-time buyers are going have a chance of getting onto the ladder with their own means.

"It's going to take time for prices to adjust to wages, and the current downward trend is undoubtedly good news for future first-time buyers. If interest rates ever rise, this will lead to further downward pressure, again good news for first-time buyers."

The current difficulties mean that every first-time buyer case Morrans has handled in the last two years has involved parental help.

"Rates at 90 per cent are still unattractive, so parents are having to help their kids get a 25 per cent deposit together to obtain the better deals," said Morrans.

He cited the example of a recent first-time buyer case, where a new teacher with a full-time permanent role, no debts and a 15 per cent deposit to put down was rejected by lenders including Nationwide and Northern Rock - both because his lack of debt meant there was insufficient credit history.

"We did get it through with Halifax. It is no secret in the industry that Lloyds Banking Group lending brands are trying to meet their government lending targets and are generally are saying yes where others are saying no," said Morrans.