The Nationwide’s grim housing market report this week – showing prices surging 2% in August alone to yet another painful record high – was inevitably greeted in some quarters as good news.
One property industry commentator wrote: “Delighted to see two positive sets of market analysis this morning with property values reaching new heights, which is an impressive effort, all things considered. Rishi Sunak’s shot in the arm for the housing market has certainly worked.”
You wonder if these people ever consider the plight of young workers toiling away paying high rents and having to save year after year for a deposit, while all the time prices escalate further out of reach.
On the same day as Nationwide issued its bad news for first-time buyers, HSBC followed with more; it said they will no longer be able to get 90% mortgages. At best, they will be able to find an 85% loan. HSBC was almost the last major bank offering low-deposit mortgages and has been overwhelmed with demand. It means a buyer of the average-priced home in the UK must now put down a minimum deposit of £33,000 rather than £22,000 before.
It is curious that the banks are quitting the first-time buyer market. The last time they did this, in the wake of the great financial crisis in 2007-08, it was because they had no money to lend. Today it is the opposite; the banks are awash with huge amounts of cash from the money not spent during the coronavirus lockdown.
Why aren’t they lending it out? Maybe they think they are soon going to face a wave of arrears and defaults when the mortgage holiday and furlough schemes end and we see the real state of the economy. Maybe they think that if they lend 90% of the cash to buy a £250,000 home, if they have to repossess in a year or two’s time, they won’t get all their money back.
As the boss of one bridging loans company, Glenhawk, says: “The end of furlough, which will be the trigger for winter of pain for millions, is imminent, and that’s before we even factor in a second spike. The market looks dangerously close to bubble territory; it’s a matter of if, not when, it bursts.”
So where does this leave first-time buyers?
1) There’s still Nationwide. It has a 90% loan-to-value mortgage at 3.24% but with lots of strings attached. You cannot use the money to buy a flat or a new-build (which are currently madly overpriced anyway), you can only borrow for a maximum of 25 years, not the 30 to 40-year terms that have, unwisely, become common elsewhere. And you cannot just get your mum and dad to give you the deposit – to get a mortgage with a 10% deposit, the buyer must prove that they saved 75% of that deposit themselves.
2) The broker Ray Boulger of Charcol is a fan of the Barclays Family Springboard deal. The bank will lend you 100% of the cost of buying your home, so there is no need for a deposit. So what’s the catch? Well, you need a helper – although it doesn’t have to be your parents – who is willing to put a sum equal to 10% of the purchase price of the property into one of the bank’s Helpful Start accounts. They will even get a decent interest rate, by today’s standards, on the money in the account – currently 1.6%. Meanwhile, the buyer pays a rate of 2.95% interest on the mortgage, fixed over five years. It’s a very interesting deal.
3) Borrow your deposit or get someone to borrow on your behalf. This is not to be recommended but brokers tell me it is going on. Unsecured personal loans are very cheap – for example, the TSB currently offers unsecured five-year personal loans at 2.81%, which is cheaper than the rate a first-time buyer might pay on a mortgage secured on a property. Of course, there is the small matter of the monthly repayments, which mostly destroys this strategy; it is £357 a month for £20,000.
4) Carry on renting and wait for prices to dip back again. This is a risky game to play. There is currently a “race for space”, with young families quitting cities to buy properties where they can work from home with more space and a good-sized garden. If you want to buy there, then get your skates on before prices rise further out of reach. But if your thing is a flat in the city centre, you can probably afford to be out of the market, save more deposit and see prices flatline or fall over the next year.
5) Follow the golden rules for first-time buyers. Avoid one-bedders, stretch yourself to a two-bedder if at all possible. Demand for one-bed flats (including shared ownership) evaporates in recessions and values fall dramatically. Two-bedders also allow you to rent a room if your finances go awry. Buy the worst house on the best road you can afford then fix it up while living in it. It is the best way to climb the ladder. And steer clear of leasehold.
You may also want to watch this year’s budget more closely than usual. Sunak has pumped the market up with the stamp duty cut. But he is desperate to raise taxes. One idea working its way up the Treasury agenda is an increase in capital gains tax, equalising it with income tax rates. This will have a dramatic impact on buy-to-let landlords, who, assuming the CGT rate does not rise until April next year, will rush to sell at least some of their portfolios before incurring the extra charge. One of the things boosting prices right now is a shortage of properties for sale; we could see that reverse later this year if landlords decide it’s time to sell up and get out.
