The issue of affordability for first-time buyers has returned to the fore of political debate, with the Tories vowing to scrap stamp duty for first-time buyers on properties worth up to £250,000.
According to the Council of Mortgage Lenders, affordability has continued to worsen. Figures released last week show that first-time buyers now typically borrow 3.38 times their income while the proportion of income spent on interest rose to 20 per cent in August compared with 19.7 per cent in July.
At the Conservative party conference in Blackpool earlier this month, Shadow Chancellor George Osborne vowed that, under Tory plans, 200,000 homebuyers a year would no longer have to pay stamp duty, saving the average first-time buyer £2,000.
Commentators say the Tories’ proposals have given greater prominence to the issue of affordability. Savills Private Finance director Melanie Bien says: “It has pushed it up the agenda.”
She welcomes Osborne’s proposal but notes that the Tories benefit from not having to cut an important Treasury revenue stream. She says: “They can say what they want while they are not in power. It is not as if they will be in a position to implement the stamp duty cut next March.”
Bien says first-time buyers are not deterred outright by having to pay stamp duty but argues that it will remain an issue as long as the threshold is not pegged to rises in house price inflation.
She says: “First-time buyers already have to pay legal fees, arrangement fees, survey and conveyancing charges. It is a burden which adds to an already stressful experience.”
In his pre-Budget report last week, Chancellor Alistair Darling declined to match the Tory pledge to ease the situation for first-time buyers but said the Government is considering what else can be done to help. He said: “As we prepare plans for more homebuilding, for eco-towns and for shared equity, we will also consider how else we can increase the supply of housing to help first-time buyers enter the market.”
Lenders seem less than impressed by Darling’s announcement. Nationwide chief executive Graham Beale welcomes the Government’s commitment to increase funding for social housing but voices concern at the decision not to act on stamp duty. He says: “We are disappointed to see that he has decided not to reform stamp duty to reduce its burden on first-time buyers.”
Stroud & Swindon Building Society sales and marketing director Paul Chafer says the pre-Budget report was a missed opportunity to support the property market.
He says: “First-time buyers already have major difficulties in funding their first purchase and with most properties now in excess of £125,000, an additional stamp duty charge only creates further complications for this particularly important section of the economy.
“The expected increase in the 3 per cent band from £250,000 to £350,000 was also overlooked, with little respite for those hoping to move up the ladder – a state of play that could lead to stagnation of the market.”
Without a significant move from the Government, where might prospective first-time buyers draw comfort?
In the short term, the Bank of England might opt for an interest rate cut, according to the CML. Director general Michael Coogan says: “There may be some relief for borrowers with expectations of a rate cut, perhaps as early as November.”
Bien points out that there are some schemes available to help first-time buyers such as the Government-backed Open Market HomeBuy scheme. However, she says many buyers resist going down the shared ownership route in favour of one of the 100 per cent-plus loan to value offers already available in the market.
She says: “People generally want to own their property in full. Government schemes help but they are mainly aimed at key workers and are not hugely well funded. Open Market Homebuy will help some people but no new funding has been announced for it.”
First-time buyers may also suffer from the after effects of the credit crunch, with a number of lenders withdrawing their products in recent weeks. Accord has withdrawn its 100 per cent and 100 per cent-plus loans while Leeds Building Society now requires anyone taking out a 100 per cent loan to have a guarantor.
However, Abbey for Intermediaries chief operating officer Clive Kornitzer does not think the number of high LTV products on the market will necessarily dip as a result of provider unease and says any shortfall created by the withdrawal of some deals will be mitigated by the move of bigger providers into the market.
He says: “Whether a provider will enter the market depends on the source from which the lender gets its funding, its consideration of the right income multiples and its appetite for risk.”
Kornitzer says there are a number of different strategies that first-time buyers might consider, including parental input in contributing to a deposit or acting as a guarantor.
He says: “The guarantor option has been around for a while but these products are not hugely popular. They can be a good option if a parent is willing to contribute their own spare income or wants to offset the inheritance burden.”