First-Time Buyers Face Obstacles Buying a House

House Deposits, Bad Credit Ratings & Negative Equity Problems

Feb 13, 2009

First-time buyers are finding it hard to buy a house. Rising house deposits, reduced lending levels, bad credit and negative equity are the main reasons for this.

According to the Council of Mortgage Lenders, the number of loans approved for first-time buyers fell from 363,800 in 2007 to 257,700 in 2008. This is due to a number of factors, including stricter lending criteria, higher house deposits due to the threat of negative equity, falling house prices and the threat of involuntary unemployment.

Is the Housing Market Improving for First-Time Buyers?

Data from the National Association of Estate Agents (NAEA) showed that the percentage of first-time buyers seeking to get on the property ladder more than doubled in the first two weeks of 2009. 22.5 per cent of registered buyers were first-time buyers, up from 10 per cent in December 2008 and 14.5 per cent in January 2009.

Peter Bolton-King, of the NAEA, stated that “These statistics are evidence that consumer confidence is slowly being restored but I must counter this by saying that unless lenders respond to consumer demand, then any green shoots will wither and die on the branch.” What are the obstacles facing first-time buyers?

First-Time Buyers and Negative Equity and Rising House Deposits

Falling house prices have led to increasing levels of negative equity amongst home owners. John Varley, Head of Barclays Bank, believes that property prices could fall by as much as 30%. The Halifax Housing Price Index shows that house prices have fallen 16.2% from their early 2008 highs.

Data from the NAEA showed that the average asking price for terraced property increased from £149,589 to £151,406 between November and December 2008. However, Halifax Housing Price Index data clearly shows that the trend remains firmly downwards. There is little yet to prove that the slide in property prices has now ended.

First-Time Buyers Require Higher House Deposits to Get on the Property Ladder

Lenders are reluctant to offer mortgages to first-time buyers without a minimum house deposit of 25%. This is because of the threat of negative equity, involuntary unemployment and subsequent loan default. This historically high house deposit requirement is one of the main obstacles for first-time buyers. The only 100% mortgages available to first-time buyers require a guarantor.

First-time Buyers with a Bad Credit Rating

The first-time buyers that face the greatest barrier-to-entry are those with a bad credit rating. Sub-prime lenders have come under considerable scrutiny in recent times. This is because they lent money to those with a high probability of defaulting on their loans. Lenders have now over-reacted to pressure and are approving a far lower percentage of bad credit mortgages.

Until stability returns to the property market, first-time buyers will find that raising a 25% house deposit is prohibitive. Falling property prices have meant that lenders remain reluctant to lend to first-time buyers. Until this situation changes, property prices are likely to remain depressed.

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