Buyers hamstrung by high deposits

By Yolande Barnes

Residential prices have bounced in recent months but on the back of very low volumes and very low — although rising — levels of mortgage borrowing. Demand is being stoked by investments by those with cash

This year, very low rates of interest on deposit accounts mean that even the relatively low rental yields provided by residential property can look attractive to equity-rich buyers.

There is more activity from those with cash seeking improved income returns (graph 1), not to mention first-time buyers funded with large equity slugs from parents. They are buying the sort of long-term family homes that are not being built any more — for example, Georgian rectories — as well as letting properties, student flats and first homes.

Such buyers want good quality, and new builds only sell if the site and product meet the now more discerning criteria. There is a relatively low number of equity-rich buyers driving the market, which is still suffering low supply and abnormally low levels of transactions. This will change if and when interest rates rise, perhaps in 12 months’ time.

It is not the cost of debt servicing that is discouraging first-time buyers from entering the market, but the high levels of deposit now required (graph 2). Even at the height of the boom, from 2005 onwards, the number of mortgaged owner-occupiers was falling because high prices made a 10% deposit for 90% borrowing unattainable.

At this time, the average first-time buyer deposit was 40% of annual household disposable income.

Despite house price falls, it has now risen to around 100% of a year’s income and is at similar levels to the deposit paid by movers with previous home ownership, and capital appreciation, behind them.

The market is dividing into the “equity-haves” and “equity have-nots”. More than 40% of owner-occupiers now own their home outright. These older “equity-haves” will seek to release equity for care in old age, while younger “equity have-nots” will have to rent for much longer than their predecessors, unless they have equity from bonuses, inheritance or the “bank of mum and dad”.

An increased demand in the private-rented sector seems inevitable. This will require flexibility in the construction sector and will create opportunities for the investment sector.

(Yolande Barnes, Property Week/Savills Research)


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