Short term prospects
Housing market activity softened across the board in December.
Although it is unclear at this stage whether the market is now set for a more sluggish period, looking ahead, it is hard to envisage further strong gains in first-time buyer numbers, in the absence of fresh positive catalysts.
Despite more upbeat metrics in January, household confidence has been undermined somewhat by recent falls in real incomes and uncertainties associated with Brexit and the future path of interest rates.
Although the wider economy has fared much better over the past year or so than many commentators had feared, the immediate future appears to hold more downside risks than upside opportunities.
Price pressures easing
House price pressures have eased a little in some parts of the housing market, most obviously in and around London, but this is not the case elsewhere, and significant house price falls are not on the horizon.
Indeed, for the time being, affordability pressures seem to be pushing income multiples still higher.
The median figure for first-time buyers now stands at 3.65, according to the latest UK Finance data.
That is, half of new lending to first-time buyers is at an income multiple higher than 3.65 and half below that level.
This is the highest figure on record, and more than 10% higher than five years ago.
Loan to income ratios
As part of its macro-prudential oversight, the Financial Policy Committee (FPC) closely monitors how income multiples are evolving as it is aware households have discretion to leverage how much they borrow by lengthening their mortgage term.
This has been a major feature over recent years, with 30- and 35-year mortgages increasingly becoming the norm among first-time buyers.
One of the FPC’s housing tools limits loans where income multiples are 4.5 or above to no more than 15% of new lending.
Firms continue to have a degree of headroom below this threshold currently, which suggests that first-time buyer numbers can continue to expand for now.
However, last summer the regulator modified the affordability test which lenders must carry out on mortgage applicants.
This means higher base rates will translate into stricter interest rate stress tests and an added challenge for households already stretching to get on the housing ladder.
With the odds of another base rate rise shortening, this may tilt the balance against much stronger first-time buyer numbers.
With affordability pressures showing few signs of abating, government interventions have been critical for the recovery of first-time buyers.
Help to Buy Equity Loan (and its national equivalents) and shared ownership have been key initiatives in this regard, as both help to ease deposit constraints.
The vast majority of Help to Buy – about 81% – has been taken up by first-time buyers. Recent figures from the Ministry of Housing, Communities and Local Government show the take-up of Help to Buy loans has been increasing. (Click to expand graph below.)
This in part reflects the provision of London Help to Buy since early 2016 which allows eligible households to take 40% equity loans.
For England as a whole, Help to Buy has grown to account for 12% of first-time buyer purchases over the past year – just over 36,000 in the year to September 2017.
Given the recent momentum, additional recourse to Help to Buy could help to underpin higher first-time buyer numbers in 2018.
Elsewhere, last November’s Budget announcement on stamp duty – removing first-time buyers’ liability on the first £300,000 of a property’s value, on sales with a market value of up to £500,000 – looks to be of only marginal relevance at best.
Most commentators expect much of any benefit to dissipate quickly through higher house prices, and so provide only very limited stimulus to purchases.
Weighing all the above factors together, it is hard to be fantastically bullish about the near-term prospects for first-time buyers.
In the absence of major fresh policy initiatives, the most likely trajectory for first-time buyers is one of only limited further gains at best.