LONDON :Why first time buyers are still piling into a hot housing market 12/08/2014

Lending to first time buyers hits record levels, as the desire to own a home negates high house prices and looming interest rate rises

Mortgage lending to first-time buyers has hit a seven-year high as the group continues to pile in to the housing market, despite high property prices, according to new data from the Council of Mortgage Lending (CML).

In June, the CML recorded the highest number of loans lent to first-time buyers since December 2007 – 28,600, an increase of 7.1pc since May and 18.7pc since June 2013.

The amount borrowed is also at levels not seen since September 2007, at £4.2bn for the month, a significant increase from May (£3.8bn) and since June last year (£3.3bn).

Due to the unprecedented house price hikes over the last year, the average deposit for first-time buyers rose to £30,966 in June, compared to £29,250 12 months ago.

Despite a slow down in the rate of growth of property values witnessed in the last three months, and most keenly felt in the overheated south-east, first-time buyers continued to pile into the market in June, at what could be the top of recent price surges.

morts 3002327c

More worryingly, the affordability levels of first-time buyers continue to creep up. Disregarding new regulatory rules in the shape of the Mortgage Market Review – which came into force in April – newcomers to home ownership borrowed 3.46 times their income in the second quarter of the year, up from 3.43 in Q1.

In fact, one in five home loans in June were to high loan-to-value borrowers – albeit newcomers or serial movers – compared to one in nine a year ago.

Although safely below the excessive lending levels of 2006/2007, creeping affordability rates will reinforce Mark Carney’s decision to cap high loan-to-value mortgages to prevent a return to “reckless” practices.

The Bank of England’s new measures came into affect at the end of June so are yet to show in housing market data but are expected to lead to a reduction in borrowing.

The average age of a first-time buyers fell from 30 to 29 in June while the average household income rose from £36,700 from £35,700.

The relatively low level of interest rates saw the payment burden remain manageable in June at 19.3pc of gross income spent in servicing capital and interest rate payments, down slightly from 19.5pc due to rising wages.

What the experts say

“Since the beginning of the year, we have seen both the number of first-time buyers and the amount they are borrowing increase, seemingly unperturbed by MMR and rising house prices. However, we haven’t yet seen any data for the period after the Bank of England introduced further measures on 26th June. As these come into place, making it harder to borrow a high loan to income mortgage, we expect the number of first time buyers to plateau or decrease.” Sophie Chick, analyst, Savills property group.

“September will see many homes that didn’t sell before the summer remarketed, many with reduced guide prices all of which will temper the final headline figure at the end of the year. With the half time results on mortgage approvals now in I expect volumes in 2014 to be up by over 10pc and prices on average to be a more sustainable 6pc up on the start of the year.

“It is interesting to see that from these figures it doesn’t seem as though controversial Mortgage Market Review which took effect in April has struck down mortgage lending like the predicted dose of Ebola many had predicted perhaps. However, MMR is having a significant impact in the time it is taking many deals to go through leaving many homeowners frustrated in their attempts to move. This may get better as the system beds down but for now agents report this as a major drag on the market.”Henry Pryor, housing market analyst.

“It’s important to analyse the regional variations at play here and for us not to get carried away with what is happening in the ‘UK” based on figures that have recently been completely skewed by big variations in London. I expect to see a cooling of prices in the capital but a continued increase in values elsewhere in the country as other area play catch up. That’s assuming the Bank of England don’t over react with an interest rate hike soon.” Russell Quirk, founder and chief executive of eMoov, an online estate agent.