House damage to first time buyers

Peter McGahan looks at how young people are being denied a place on the property ladder and explains why a ladder with its bottom rungs missing is not stable.
first time buyers in the property market
First time buyers are being priced out of the market.

We covered house price bubbles last week and had several questions regarding where this leaves many in society.

From a societal point of view there is disruption undoubtedly. First time buyers, once again, are squeezed out of the market. I’ve written that line on five occasions in my life, yet central banks repeat the mistakes. When agents are openly calling it ‘mental’ and ‘borderline obscene’, pause for thought. It might just be ‘mental’ later.

Remember, a (housing) ladder with the bottom rung missing isn’t stable.

If you do the basic maths on young people affording a home (not investment) everything has slowly been taken out of reach.

Coming out of university with a heavy debt, high rents, and no ability to save a deposit, it’s easy to see how young people are disillusioned.

Loan to value, or ‘LTV’ as it is called, is the amount we borrow versus the perceived value of the home. An asset’s value is only what someone is prepared to pay for it, not a random ‘TV personality’s’ view. Trying to sell a house after the 1987 crash, I had 10 years awaiting a viewing. No buyer, no value.

First time buyers beware

Currently the maximum LTV can be 100 per cent (the amount a bank is prepared to lend) but that has serious flaws where there must be a guarantor – Can, worms, snakes, are a concoction of words that come to mind.

The maximum LTV mortgage is 95 per cent, and if we take the average house price in the UK to be a staggering £265,000, the first time buyer must somehow save over £13,000 as a deposit before they even put a piece of furniture in the house. Remember of course that the best rates are available for those with more than 10 per cent as a deposit rather than the 5 per cent above.

Legal, survey, valuation and moving fees vary from £1,500 to over £6,000 depending on a few factors: Does the lender charge a mortgage fee, is it added to the loan or not; Does your family help you move? Do you have removal costs? Do you need a structural survey?

It’s therefore likely to be a minimum available cash of £16,500 for the average person to make it onto that first rung.

The average income in the UK is £31,461, with a take home pay of c£25,000. Quite how a single person can come up with £16,500 from £25,000 is beyond me, given that the average living costs are £1,770 per month, meaning it takes over four years to get to the starting point, meanwhile house prices may have moved on again further.

Your lender also assesses your ability to pay via income multiples which has been allowed to swell to as much as 5.5 times a person’s income –  5.5 times £31,461 only allows a borrowing of £173,035, which is well short of the average house price of over £265,000.

In further signs we are in bubble inflating territory, let’s remember that income multiples in 2007 before the bubble really burst were a mean of 3.39 times for first time buyers. Home movers were 2.15 times income.

For long periods running up to the previous bubble, the maximum income multiple was just three times the biggest earner and one times the second. Today 4.5 times joint income is the norm and those with incomes over £80,000 can borrow even more. To give that perspective, pre 2007, using the previous calculations you could borrow £125,844. Today, you could comfortably borrow over £283,000.

All of this must clearly be based on lenders expecting low interest rates for some time. Remember in 2007 interest rates were at 5.5 per cent when they were using the above affordability measurements. Today the base rate is a tenth of that.

Looking back in history at house prices, the main benefactors of course have been the banks and those with more than one property. Higher house prices mean more borrowing and for longer. It also encourages unhealthy institutional investment in both property and the mortgage-backed securities.

As Blackstone pay $6billion to acquire a single family rental company, Norway signal a potential move with rates to slow down its market and New Zealand have now moved to add house prices into account when setting central bank monetary policy.

Surely a house is a home in the end?

If you have a query about the content of this column, you can to Peter’s team on 01872 222422, email [email protected] or visit

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Tags: , Last modified: September 2, 2021

Written by 4:03 pm Property, Finance