FTB’s set for struggle even if house prices fall

Falling incomes and the risk of more restrictive lending look set to leave first-time buyers struggling to get onto the property ladder even if house prices fall, new analysis published by the Resolution Foundation has highlighted.

A new report from the Foundation took the Office for Budget Responsibility’s (OBR) house price scenarios as its starting point and explored what the different trajectories could mean for those looking to purchase their first home.

The research suggested that plummeting incomes and rising unemployment, combined with low interest rates, mean that the most pessimistic scenario – a sharp 22% drop in house prices by the third quarter of 2021 followed by a long and slow recovery – is a realistic one.

However, house price falls are predicted in even the most optimistic OBR projection, the report highlighted. The Foundation argued that in a post-pandemic world, first-time buyers will lose out on any potential benefits of cheaper housing.

Resolution Foundation principal research and policy analyst, Lindsay Judge, commented: “The coronavirus crisis has had a big impact on the education, career prospects and incomes of young people – and unfortunately there’s no silver lining for this group when it comes to house prices.

“Although prices are projected to fall – perhaps dramatically – in in the wake of the pandemic-induced recession, this drop won’t make things any easier for typical young first-time buyers looking to purchase their first home. Instead, falling incomes and credit restrictions will likely make home ownership every bit as difficult as before for many young people.”

Although some households have managed to save more during lockdown, the report indicated that just 13% of private renters aged between 24 and 35 had savings of £10,000 coming into the crisis, and that a quarter of private renters have been forced to dig into their savings since the pandemic began.

The report also warned that if banks and mortgage lenders repeat their response to the financial crisis by introducing tighter credit conditions, this could have a serious impact on aspiring buyers.

The Foundation estimated that if the average first-time buyer LTV ratio fell to 80% – the level observed in the wake of the financial crisis – by 2024, the typical number of years required to save for a deposit would rise to 27, even if house prices fell by 22%.

“Only those who already had high levels of savings before the pandemic started, or those who are able to borrow from their family, will truly benefit from the house price fall,” Judge added.

“This means the current crisis looks set to deepen pre-existing inequalities and the growing divide between those who are able to look forward to home ownership, and those for whom this dream is increasingly out of reach.

“Going forwards, policymakers must ensure that young peoples’ incomes are protected in the wake of the coronavirus crisis, and that their competitive advantage as first-time buyers is maintained when the stamp duty holiday comes to an end.”

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