There were 26,100 first time buyer sales in July, 8,100 more than 12 months ago, the highest number of first time buyers since November 2007, according to the latest First Time Buyer Monitor from LSL Property Services.
It is an indication that the improvement in the first time buyer market is gathering even more momentum with a sharp increase in the affordability of mortgages driving the improvement, the firm said.
The average mortgage rate fell from 4.92% in July last year, to 3.99% this year, attracting more buyers to the market. Rates have now fallen every month for the last year, as banks are passing cheap credit from Funding for Lending onto borrowers.
The cheaper rates meant that mortgages were more affordable for first time buyers. The proportion of income represented by mortgage repayments fell year on year from 21.6% to 20.4%.
But there are warning signs ahead, with rapidly rising house prices threatening to price the next wave of first time buyers out of the market. Deposits now represent a far greater proportion of the income of a first time buyer, and are rising.
The report says that the average deposit is now equal to 83.1% of annual income, up 5% on July last year and slowing the pace of the recovery in first time buyer lending. This was a result of rising house prices, which have pushed average deposits skyward, despite banks’ willingness to lend to those with a smaller deposit size.
The average purchase price for a first time buyer rose by 8% year on year in July, and is now £146,726. This was 0.3% higher compared than in June, when the average purchase price was £146,250 and 6.0% higher than the average price so far this year, which was £138,353. And the average LTV for a first time buyer remained broadly flat, down 0.4% year on year to 79.5% in July, and down just 0.1% from June.
‘Mortgages are much more affordable for first time buyers compared to last year, which has opened the door to thousands of would be buyers who were shut out of the market,’ said David Newnes, director of LSL Property Services.
‘Economic confidence is returning, nudging many more buyers in the direction of property, and nudging lenders to offer more loans to buyers with smaller deposits. Rates have fallen sharply, and there are good deals to be had for savvy first time buyers, which has made a mortgage much easier to come by. The uptick in confidence, beneficial to both parties, is contagious,’ he explained.
‘But there is a downside to the good news. There is simply not enough housing stock to match continued demand. If supply fails to keep pace with demand the housing market will become increasingly unsustainable. Prices will rise sharply, and future first time buyers will be left in the lurch. There is a desperate need for further cheap property in order for the run of success to continue,’ he added.
The data also shows that in July, 98% of registered tenants wanted to become a home owner, up 2% from April, and 9% higher than in December, but only 12% are expecting to buy before the end of the year. Almost half, 49%, are expecting to buy in the next five years, a significant increase from the start of the year. In December, only 36% of tenants expected to buy in the next five years.
And tenants currently unable to become first time buyers named the inability to save for a deposit as the biggest stumbling block to home ownership. Some 46% are unable to buy as they can’t save for a deposit, and 19% of potential first time buyers are concerned that rising costs like stamp duty will get in the way, up by a third from just 13% in December 2012.
The concerns over building a deposit are even more apparent in London and the South East. In this region, 55% of tenants who can’t afford to buy are prevented by high deposit requirements, 12% higher than in the rest of the UK. This is a result of prices in the capital rising more quickly than the rest of the UK. The latest England and Wales house price index from LSL shows that house prices in London have risen by 7.1% over the year to June, whilst prices in England and Wales as a whole rose by just 2.2%.
Transaction costs such as legal fees and stamp duty are more of a concern to tenants in London and the South East, with 27% naming these costs as a key factor blocking them from purchasing property, compared to just 16% in the rest of the UK. Worries about having enough income for repayments played a lesser role than in the rest of the UK, concerning just 8% of potential first time buyers.
‘It remains a huge challenge for first time buyers to purchase property in the capital. House prices are more expensive, and the size of deposit required dwarfs that in the rest of the country. It’s the reason why six out of tenants in London can’t afford to buy. And there are further concerns for the London market. Higher legal fees and stamp duty costs are turning further first timers off buying,’ said Newnes.
The average first time buyer in July was 30 years old, with an annual salary of £36,299 per annum, 4% higher than in July 2012, when the average salary was £34,936.
The number of first time buyers who were able to self fund their purchase fell to 41% in July, from 51% in April. 36% of all first time buyers in the UK received financial help to put together a deposit from parents or relatives, whilst 9% benefitted from an inheritance, and 2% received familial help with mortgage repayments. 4% received financial help from a government scheme such as Help to Buy, up from 1% in April.
Once again, Londoners need the most help to get onto the ladder, with 44% of all first time buyers in London receiving help towards a deposit, compared to just 33%, and just 36% of buyers able to self finance.
Some 44% of all first timers were looking for houses with three or more bedrooms, and 31% were looking for two bedroom houses, the second most popular type of property. Flats continue to attract far fewer first time buyers with just a quarter of buyers looking for flats rather than houses.
Some 41% of first time buyers said they were choosing to buy now as they had only recently been in a position financially stable enough to purchase a property, while 26% chose to buy to own a house with their partner, and 25% feel it is time for them to settle down. Only 8% bought for investment purposes, expecting house prices to rise, down from 11% in April.
And first time buyers are confident that the value of property is set to rise with 46% believing that house prices will rise by up to 5% in the next year, while a further 18% believe prices will rise between 5% and 10%. Some 28% of first time buyers believe prices will remain flat in the next year, while less than 4% believe prices are likely to fall.
