Even the Bank of Mum and Dad cannot keep pace with London’s spiralling property market.
The average cost of a home in the city has climbed to more than £500,000 (Dh2.9 million), forcing first-time buyers to make the largest down payments as a proportion of their income in at least a decade, according to an analysis of Council of Mortgage Lenders (CML) data by Neal Hudson, an associate director at Savills. It is also prompting them to take out larger mortgages, the CML said.
At almost four times income, lending multiples for first-time buyers of average London homes are close to the limit for many banks after regulators last month ordered a crackdown on risky lending. That spells further financial pain for parents, who give their children about £2 billion a year to help them get onto the property ladder, the housing charity Shelter said in July 2013.
“Young people in decent jobs are relying on their parents just to rent a home, never mind save for a mortgage deposit,” says the National Housing Federation chief executive David Orr.
“Without the support of their parents, an entire generation is at risk of missing out on home ownership. And for those who cannot rely on parental help, the situation is even more bleak.”
London home values rose 20 per cent in the 12 months through August, according to data compiled by the office for national statistics. That pushed the average price up to £514,000, about 46 per cent more than before the financial crisis. Which is where the Bank of Mum and Dad comes in.
Two-thirds of first-time purchasers in the United Kingdom now receive money from their parents when buying a home, double the level five years ago, according to the National Housing Federation, a lobby group for affordable homes.
The average first-time buyer in London borrowed £212,000 in the second quarter, or 3.9 times their income, compared with 3.7 times a year earlier, the CML said in August. They are paying 62 per cent of their after-tax salary to make the mortgage payments, the highest level in six years, according to Nationwide Building Society.
That is despite London homebuyers having average down payments of 130 per cent of their salary, the most in at least a decade, says Mr Hudson. The extra savings, or money from their parents, is needed as high loan-to-value mortgages were withdrawn in the aftermath of the financial crisis, he says.
In Ireland, which suffered western Europe’s worst property crash, down payments for first-time buyers have fallen from about 180 per cent of the income in 2008 to about 110 per cent in 2013. Dublin is now considering limiting high loan to income mortgages. The prospect of higher interest rates in the UK is starting to deter buyers. Mortgage approvals for house purchases fell 10 per cent in September from a year earlier, the British Bankers’ Association says. Housing-market transactions may have dropped 9 per cent from August, according to Acadata and LSL Property Services.
London, which was the first to emerge from the past UK property slump, is seeing the biggest drop in demand. Foxtons Group, a property broker based in the UK capital, says a “sharp” slowdown in the number of homes being sold in the city will cause its 2014 earnings to drop. That triggered a 20 per cent decline in the company’s shares.
Many first-time buyers in London find themselves relying on the Bank of Mum and Dad, “who themselves will be feeling the pain of persistently low interest rates on savings they may have”, says Richard Sexton, a director at property appraiser e.surv. “Moving it from a low-interest account to invest in property is probably an attractive choice for many.”
To increase lending, the government introduced the Help-to-Buy programme, which enables home purchasers to take out a loan with a down payment of as little as 5 per cent on properties valued at as much as £600,000. It also plans to make it easier for people aged 55 or older to access their pension fund to draw down a number of lump sums instead of just one, which may be used to boost payments to children for homes. Regulators are moving in the opposite direction, introducing measures to limit lending. These include restrictions on high loan-to-income mortgages and a stipulation that lenders turn down credit to homebuyers who fail a stress test, which assumes an immediate 3 percentage-point increase in the benchmark interest rate of 0.5 per cent. Lloyds, the UK’s biggest mortgage lender, and the Royal Bank of Scotland, say they will limit clients to a maximum of four times income on mortgages of £500,000 or more to dampen house price inflation in London.
About half of new mortgages in London are for four times income or more, according to an estimate by Julian Sinclair, the chief investment officer at Talisman Global Asset Management. That “just shows how stretched new mortgage lending in London is, especially relative to incomes”, he says.
Parents are giving £23,000 for each child’s first home purchase, the homeless charity Shelter says. Almost 20 per cent of parents used money that had originally been set aside for retirement or elderly care.
In London, “most prospective first-time buyers would be unable to afford the repayments on a 90 per cent to 95 per cent loan to value mortgage even with current low mortgage rates,” Mr Hudson says. “The majority of first-time buyers that are able to purchase in London are those with a large deposit available.”
Parts of the UK capital are already off-limits to most first-time buyers. About 56 per cent of homes in London’s best districts, including Chelsea and Notting Hill, are now worth £1m or more, Marsh & Parsons says. Investors were the biggest buyers of homes in prime neighbourhoods, purchasing 26 per cent of the properties, down from a record 31 per cent in the previous quarter, the broker says.
business@thenational.ae
Follow The National's Business section on Twitter
