Striking a Balance
The First-Time Buyer Dilemma Is buying a home sooner worth the higher mortgage costs? An average first-time buyer can save for a 5% deposit almost eight years faster than a 15% deposit The deposit barrier has long been a key factor in preventing many from buying their first home. A typical first-time buyer deposit required for an 85 per cent loan to value (LTV) mortgage in England and Wales is now 24,28, almost 2 per cent higher than the average annual post-tax income of a young full-time worker. In, this rises to 67,83, over 16 per cent more than the average post-tax income of a young full-time worker in. However, the increasing availability of higher LTV mortgages, thanks in part to the government s introduction of the Help to Buy Mortgage Guarantee scheme in 213, has meant many buyers are now able to buy their first home with just a 5 per cent deposit. An average couple, working full-time, can save a deposit on a 95 per cent LTV mortgage, in two years and a single buyer in six years. This is more than three years and almost eight years faster, respectively, than they could have saving for a more typical 85 per cent LTV mortgage. other things. For a single buyer, this represents a 36 per cent cut in their available income. Housing affordability issues are most severe in the capital and choosing the low deposit route to buy a home faster is a very attractive remedy for those struggling to meet the upfront cost for homeownership. The reduction in the length of time required to save a smaller deposit is certainly striking; the smaller deposit means that a couple can buy a home in just over 4 years and a single buyer in just under 12 years; that s 7 and 46 years quicker than they would if saving for an 85 per cent LTV loan. However, the additional mortgage costs would leave buyers with 6,4 a year less to spend on themselves this is simply impossible for many to afford. The extra annual cost of opting for a 95% LTV Mortgage over an 85% LTV Region Annual Cost Time to Save - Couple Number of years 12 8 6 4 2 5 45 England & Wales Time to Save - Single Buyer South 85% LTV Midlands 95% LTV North Wales It comes as no surprise why many will see the smaller deposit as the quickest route to home ownership. However, there is no such thing as a free lunch and the trade-off is in paying for the finance. A lower initial deposit would mean that buyers face higher monthly mortgage payments which would eat into their disposable income. North East 1,188 North West 1,397 Yorkshire & the Humber 1,491 East Midlands 1,685 West Midlands 1,717 East 2,653 6,413 Number of years 4 35 3 25 2 15 The additional borrowing on a 95 per cent LTV mortgage would cost 2,3 more a year to service. For an average couple this means that they would have per cent less each year to spend on 3,213 2,385 Wales 1,477 England & Wales 2,296 5 England & Wales South 85% LTV Midlands 95% LTV North Wales 1 2
In:Out It Certainly Shook Us All About! The vote to leave came as a shock, but life goes on. Front-Loading Market conditions are limiting transaction growth and further uncertainty won t help much. After the rally in currency and stock markets the day before, the referendum result came as a shock especially in. The UK voted 52 per cent to leave the EU against 48 per cent to remain on a turnout of 72 per cent (the general election turnout was 66 per cent). Currency and stock markets sank, and we now have to assess the likely impact of this historic decision. The honest answer is that it s far too soon to know. Financial and stock markets are still volatile and with David Cameron s resignation as prime minister and a proposed vote of no confidence in Jeremy Corbyn, the leader of the opposition, there is political uncertainty to throw into the mix too. What can we say? Clearly there are risks ahead, but people will still need to move home for personal and practical reasons. Those looking to buy and sell now or who are already in the pipeline will already have taken the possibility of Brexit into account, and early indications suggest that they are happy to continue with their move. And for overseas buyers the fall in Sterling gives the added bonus of a bargain, even without any sterling price negotiation. Most economists predict that leaving the EU will slow the UK s economy, and that will probably have implications for the markets. But it s not necessarily all gloom. Unlike the major crash in the early 199s, caused by a big hike in interest rates, the Bank of England is unlikely to raise rates rapidly even if there is a hike in inflation caused by more expensive imports. And even if the bank has to raise rates to support the currency, 5 per cent of mortgage holders are on a fixed rate, compared with 35 per cent 2 years ago, so the market is unlikely to be affected by distressed sales. Unlike the 28 financial crash, banks and mortgage lenders are in a much more secure position thanks to the rules put in place under the Prudential Regulation Authority. As a result, they are able to withstand greater stress and uncertainty in the market. The severe credit crunch experienced then seems unlikely to repeated now as a result of the vote to leave. Undoubtedly uncertainty will have some effect on markets, but over time that will dissipate as the details of the UK s exit from the EU becomes clearer. And, it is in everyone s interest to make that exit as smooth and painless as possible. Sterling v US$ & Euro 1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15 1/5/216 1/15/216 1/25/216 2/4/216 2/14/216 2/24/216 Euro into Sterling 3/5/216 3/15/216 3/25/216 4/4/216 4/14/216 4/24/216 US $ into Sterling 5/4/216 5/14/216 5/24/216 6/3/216 6/13/216 6/23/216 Source: BoE The latest HMRC transactions data show that for the year to May transactions have grown by 13 per cent compared with the same period last year. But, looking at the month of May alone, transactions are down by 12 per cent year on year. This illustrates well the level of distortion in the market caused primarily by the stamp duty hike back in April. Knowledge of higher transaction costs from April drove many to bring forward their purchases so we saw larger than expected transaction growth in the first three months of the year. That also resulted in larger than expected fall in transaction growth for the months after. There was also a similar pattern of activity being brought forward and then waning in mortgage approvals data, which account for around 6 per cent of final transactions. Part of this no doubt has to do with declining interest from investors. After a 226 per cent year on year increase in buy-to-let mortgages in March, the number of mortgages issued fell by 51 per cent in April compared with last year. The Bank of England Credit Conditions survey also shows that the consensus from banks shifted to expecting the level of buy-to-let lending to decline further in the second quarter of the year. The net balance of bankers expectations of demand for buy-to-let lending between April to June fell to levels last seen in early 29. This all came against the backdrop of the uncertainty created by the EU referendum. Uncertainty weighs heavy on the market and typically causes those making large financial decisions to pause. Buyer registration numbers, up 2 per cent compared with last year, suggest that there may have been some delay in activity as buyers waited to see the result of the EU vote. That is now settled, but brings its own, even greater uncertainties, which along with the looming tax relief changes for landlords, could mean that transaction growth will be disappointing for a while longer. Early signs are that a weaker pound is encouraging more international buyers to take advantage of the relative price cut, which will provide some support, but that s only a small proportion of the whole market. Transactions & Mortgage Approvals 3 4 YoY Change 8% 6% 4% 2% % -2% -4% Jan-15 Feb-15 Mar-15 Apr-15 May-15 Transactions Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Net Balance of Buy-To-Let Lending Demand Expectations Net % Balance 4 3 2 - -2-3 -4 Mar-8 Aug-8 Approvals Jan-9 Jun-9 Nov-9 Apr- Sep- Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Source: HMRC & CML Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Source: Bank of England
Unaffordable Rents? Not Quite headlines mask that many regions have more affordable rents than in 27. The Market in Numbers A look at the latest market data for the first 5 months of the year. The average rent on a one-bedroom home in Great Britain now accounts for 48 per cent of the average post-tax income of a full-time worker aged under 3. This is up just three percentage points from 45 per cent in 27. Rents have increased by 27 per cent since 27 outpacing a 16 per cent growth in incomes. However, for more than half of the country the proportion of income taken up by rent is less now than it was in 27. Despite rising rents over the last nine years, income growth in some regions has grown faster, which has softened the effect on rental affordability. In the North East, the cost of renting a one-bedroom home accounts for 35 per cent of the post-tax income of an average young full-time worker, much lower than the 42 per cent it did in 27. Here tenants have benefitted from a 32 per cent income growth, while rents have only increased by 11 per cent over the same period. The improvement in affordability isn t just limited to the familiar cheaper Northern markets. The typically expensive & regions have also seen renting become more affordable for young workers. The proportion of income taken up by rent has fallen by 1 and 4 percentage points in the and respectively compared to 27. It s a very different story in the capital however. The cost of renting a one-bed home in now takes up 57 per cent of the post-tax income of an average full-time worker aged under 3. This is a 16 percentage point increase on the 41 per cent of income in 27. Rents have risen by 48 per cent since 27 more than four times as fast as the 11 per cent increase in incomes and this has put tenants in under increasing affordability pressure. As affordability has deteriorated in some regions, tenants have opted to reduce the burden by sharing. Since 27, the proportion of one-person households in the private rented sector has decreased by 3 per cent, while four and five people households have grown by 2 per cent & 1 per cent respectively. The Costs of Sharing % of post-tax income spent on rent 7% 5% 3% % % 1 Bed - 1 Person 2 Bed - 2 People 3 Bed - 3 People Great Britain Source: Countrywide Research 1 Bedroom Rent as % of Post-Tax Income Region 216 27 North East 35% 42% North West 37% 35% Yorkshire & The Humber 38% 41% East Midlands 33% 36% West Midlands 38% 38% East 42% 39% Greater 57% 41% 41% 42% 4% 44% Wales 42% 35% Scotland 35% 39% GB 48% 45% Source: Countrywide Research Average Price Year on Year Price Growth 558,361 346,643 243,778 Total Transactions 71,755 87,97 55,498 3% 2% Asking to Achieved Change from 215 99.6% 98.9% 98.% +.3% +.5% +.6% Total Value of Sales % of Investors 4.1bn 3.5bn 13.5bn Change from 215 % of First-Time Buyers Change from 215 14% 12% +1% -2% -3% 15% 12% +2% +3% Source: Land Registry, HMRC & Countrywide Research 5 6
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