Record debts for first time buyers

First-time buyers are having the hardest time ever in getting onto the property ladder. So says a report from the Council of Mortgage Lenders (CML).

Recent rises in interest rates, together with increases in taxation and rising house prices mean that houses are less affordable now than they have ever been. An average house buyer now has to borrow 3.37 times their income to buy a home (figures from May), up to a record level from the figure of 3.33 in April. Figures show the average loan taken out by young buyers has reached a record £117,000. This is almost £10,000 more than a year ago, and it is on an average salary of £35,000. Banks and building societies have scrapped their old lending rules to enable some buyers to borrow five or six times their salary. There are fears that many will be unable to survive the increase in payments caused by recent increases in interest rates.

Additionally mortgage interest repayments take 19.1% of the average income of a first-time buyer and that figure is at its highest level for 15 years.

These figures do not even include the latest two interest rate increases from May and July, so it is certain that figures are going to go even higher.

Add to these figures the fact that record numbers are paying the despised stamp duty, which now averages £1,458. The number of first-time buyers paying the tax has now reached 60%, up from 52% in May 2006. This represents a marvellous windfall for the Treasury – a grossly unfair burden on those trying to buy a home for the first time.

CML director general Michael Coogan said that anyone wanting to get onto the property ladder, or indeed move house, was finding it less and less affordable with each passing month. Record numbers of people paying stamp duty only exacerbated an already difficult situation.

The centre-right think-tank Policy Exchange recently called for a complete revision of stamp duty rules – or its abolition. Their chief economist Oliver Marc Hartwich said that everyone aspires to owning their own home, but soaring house prices have made it tough. The Government’s policy on stamp duty, he claimed, had now made it all but impossible for a large number of young people.

It was in the early 1990s that the proportion of take home pay being paid on mortgage interest peaked at 25% just before the housing crash and recession of the period. The 19.1% of May may be short of that figure, but it is on an upward trend and much higher than the 11% of around five years ago.

The whole situation is made even worse by mortgage providers who are pushing rates up even ahead of base rate announcements by the Bank of England. Banks and Building Societies certainly have no intention of risking allowing any consumers to get on a decent rate if the banks can prevent them. Soaring arrangement fees (which have gone up ten-fold in some cases in the last four years) will ensure that anyone getting a seemingly good headline rate is caught anyhow.

Economists believe that all these signs, especially the 19.1% and 3.37 times income figures, suggest that the housing boom is coming to an end because it is clearly unsustainable.

Nevertheless, property prices continue to rise. Nationwide Building Society recently reported that annual house price inflation was 11.1% in June – and that was its highest rate for two years. Other recent figures have disagreed with Nationwide’s figures and have suggested that the housing market is finally cooling down.

The Bank of England has now raised interest rates five times in the last twelve months, taking the base rate from 4.5% to its current level of 5.75%. With inflation still above the Government’s 2% target, spending on the high street still high and the housing market still not cooled sufficiently, it is widely expected that interest rates will go up even further. The popular prediction is for the base rate to reach 6% in the autumn, and there is an outside chance of a 6.25% peak in early 2008. This would spell disaster for many people on trackers, discounted mortgages, or anyone left on a provider’s standard variable rate (SVR). However, that is not a consideration for the Bank’s Monetary Policy Committee whose only objective is to get inflation to the 2% target.

There is a still a body of over a million homeowners who are on low fixed rate deals coming to an end in the next few months. When those deals come to an end many of them are going to be faced with mortgage repayment increases of anything up to 80%, and a minimum of an increase by a third.

When that happens, what will happen to house prices and indeed, the wider economy?