At the Leicestershire Chamber of Commerce lunch last week the President, Rick Moore, commented on the difficulties currently being encountered by first-time buyers in the housing market. He highlighted the fact that the average age of the first-time buyer is now 35, whereas 10 years ago it was 23. He rightly felt that this was an important issue that needed to be tackled by the industry.
The Times recently reported on new difficulties that first-time buyers are likely to face under the planned restrictions being mooted by the city watchdog, the Financial Services Authority (FSA). These proposals are intended to close, bolt and deadlock the stable door now that the horse has disappeared over the horizon, and if approved will introduce “affordability assessments” to demonstrate that borrowers have the ability to pay significantly more than the cost of the mortgage they want to take out. There are also proposals to restrict the terms of mortgages to 25 years, to end to self certification loans and to review interest only mortgages.
The Council for Mortgage Lenders (CML) has calculated that 45% of first-time buyers granted mortgages in the first half of 2010 would have been rejected or allowed to borrow only a lesser amount if these proposals had been in force.
The housing industry is one of the most significant drivers of economic growth in this country. Its prosperity is fuelled by new entrants into the market, otherwise known as first-time buyers. Without them the remainder of the market stagnates. However it appears that the FSA is intent on making life as difficult as possible for first-time buyers, and in doing so endangers the recovery of the housing market and the economy as a whole.
We have grown used to retrospective government legislation accurately solving the problems of the past without anticipating the needs of the present and future. We can expect little else from politicians whose decision-making is ultimately based on winning votes. It is therefore left to the industry to provide a solution within the restrictive legislative framework set out by government. It is encouraging that the industry has always succeeded in the past.
But what is the solution this time? The 1946 Frank Capra classic, “It’s a Wonderful Life”, is a reminder of what building societies used to do. The “good old” Bailey Building and Loan was a local institution making independent decisions about the ability of borrowers to repay and genuinely helping people to get out of “Potter’s slums” and into their own home. What would the FSA have thought about that?
But the lack of a regulatory-fettered lender is only part of the problem. The government’s own statistics show that house prices are still at historically high levels relative to first-time buyers’ incomes. The last survey was completed in February 2010 and demonstrated that the price to income ratio at that time was 4.47, close to historic high of 4.57 in 2004. To get first-time buyers back into the market this ratio needs to be no higher than 3.5 and therefore incomes must increase (unlikely in the immediate future) or house prices must fall.
The Office for Budgetary Responsibility (OBR) predicted in its November report a decrease in house prices of 1.4%, but this is likely to make little impact in reducing the price/income ratio to levels that will encourage buyers to the market. The OBR prediction is a consensus figure made up of independent city and non-city forecasts, and opinions for 2011 vary between +13.3% to -10%, and therefore the fall in house prices could be much more (or indeed much less).
The house building industry has little ability to influence either incomes or house prices, and therefore to make a positive contribution it needs to address both the cost of providing new homes and the method of sale.
Build costs are stable at the moment, but the majority of new homes are built the same way they were 100 years ago. Surely there is a more efficient, cost-effective and sustainable solution.
The planning system also places huge costs on the provision of new homes. Although the evidence is anecdotal, the costs of flood risk assessment, ecology surveys, Design and Access statements, and the other endless requirements of local authorities before they will even consider a planning application, all add to the cost of the final product. New codes for sustainability (worthy but unaffordable), Section 106 contributions and the demand for private developers to provide affordable housing, all drive up the cost of new homes.
And then there is the issue of land values. Landowners have become used to achieving spectacularly high prices for housing land, and history suggests that such values will probably return at some point in the future. They are understandably reluctant to release land at today’s depressed prices, but if the industry is to provide housing that is affordable (as opposed to subsidised affordable housing) a way must be found to encourage the release of land at prices that offer a reasonable premium to existing use values whilst maintaining affordability.
Rick Moore is right that first time buyers need to be brought back into the market. We cannot expect politicians to do anything more than chase votes and therefore it is down to the industry to provide the solution.
Ready when you are.