GETTING a foot on the property ladder is hard. But, taking the second step could be even harder. Agonising market conditions mean that it could now be the most challenging time to be a “second stepper” in years.
Research shows that a first-time buyer stays in their first property for around four years. Since the housing market’s peak, UK property prices have fallen by approximately 20 per cent, according to Halifax, meaning that some of today’s first-time sellers could be selling their house for less than what they bought it.
The situation is reminiscent of the 1990s, when the early part of the decade was characterised by steep falls in house prices, followed by a lacklustre rebound in the latter part.
Buyers hardly need reminding that the property market is markedly different to what it was before the crisis. Ray Boulger of John Charcol says that a key metric to gauge the problem is the loan-to-value ratio (LTV): “A buyer of ‘good credit’ would have been able to obtain a 100 per cent plus LTV mortgage pre-crisis – enough to buy a property and borrow their deposit. Now, those with the best credit are looking at 75 per cent LTV. However, to get access to the best rates, you will need a 40 per cent deposit.”
A perfect storm of falling house prices and tightening lending conditions has brought about a situation where many second steppers do not have enough equity to afford a deposit for a larger property. Research suggests that the average deposit now required for a second home is £61,500, a figure that has increased by nearly 70 per cent over the last decade. The situation is even drearier in London, where the average deposit needed to buy a second home is £113,000.
According to a recent report from Lloyds bank, affordability – measured by the ratio between gross earnings and average house prices – for a second stepper home is now the worst it has been “in a generation”. It has increased from 3.2 times gross earnings a decade ago to 4.7 times – the second highest reading since records began 25 years’ ago. Although this has fallen since June 2011, when the ratio stood at 5.2, it still compares unfavourably to a ratio of 4.1 for today’s first-time buyers. It is also a stark contrast to the situation at the peak of the market in 2007, when the affordability ratio was 5.5 for first-time buyers compared to 4.3 for second steppers. They also estimate that second steppers only have £9,000 equity – or five per cent of the value of a typical second stepper home.
In March, the government backed NewBuy, a scheme designed to help those all buyers, including second steppers, who are excluded from the housing market because they do not have a sufficient deposit. Buyers need a minimum deposit of five per cent and will be able to obtain a 95 per cent LTV mortgage on new-build properties.
Talking to City A.M., in his previous role of minister of state for housing and planning, Grant Shapps made clear his intentions to help homebuyers: “I’m determined to help both aspiring first-time buyers and those who have outgrown their homes but have been unable to move.”
Shapps explains “that’s why the NewBuy Guarantee is the first scheme of its kind to not be confined just to those looking to get onto the property ladder for the first time, but to also help second-time buyers with just a fraction of the deposit that they would normally require.”
The Home Builders Federation say that up to 80,000 homes could be available under NewBuy. But the take-up is low, with only 1,300 homebuyers purchasing under the scheme since its launch. When the scheme launched, only seven developers and four lenders signed up –although now over 30 developers and six lenders have joined giving buyers a wider choice.
The real solution to the problem of affordability lies in building more homes. There has been an average of 142,000 annual housing starts over the last 10 years, according to the Department of Communities and Local Government. In 2011-12, only 105,000 were built. Until that number moves upwards, the second step will likely be as tough as the first.