The Clydesdale Bank and Yorkshire Bank have carried out research of the UK housing market over the last four months and are indicating that now is the time for first time buyers to get on the property ladder. In November 2006, a first home in Scotland cost on average £110,174 – this is now £113,351. The results from this survey are very interesting as I also believe that with prices now below peak levels and sellers willing to do deals, this is a great time for first time buyers to get on the property market.
The issue of first time buyers formed the basis of a conversation I was having with a client the other week. People have often asked me about house prices and how wealth is generated via the property market. While things recently got out of kilter and central Government did not control the market the way they should have – see previous blogs re capital gains tax controls and also extra taxes on house sales, the general pattern of wealth creation in the property market is as follows:-
First time buyer buys property – valued £100,000 with a 5% deposit i.e. borrowing £95,000
The first time buyer stays in the property for on average 7 years. During this time as well as repaying part of the mortgage, the owner’s salary increases allowing increased savings and borrowings plus the value of the property slightly increases – this increases the deposit for future purchases.
The buyer moves up the property ladder buying another property with a higher value, higher mortgage but larger deposit. The same process repeats itself – mortgage repayment, increased savings, house value increases.
Once again after an average of 7 years they move up the property ladder again higher price, higher mortgage but increased deposit.
They stay in that property for a further 20 years and in that time there may have been another upward move. They now have their mortgage paid off, their house value has increased and they are looking to downsize. They are now able to purchase a property in cash putting aside a lump sum to assist with their old age and as part of their wealth generation.
This is a very simple model but it shows the importance of first time buyers coming into the market and shows that over the long term, property is a very safe bet and that people should be encouraged to own their own home. As mentioned, in a normal market we need 40% of purchasers to be first time buyers to make sure that the market moves at a normal rate, creating wealth and keeping things moving. We need the Scottish and UK Governments to work with lenders to assist first time buyers get on the market.
Head of Property Services