Lower deposit deals have been withdrawn on concerns around negative equity if house prices fall
Many first-time buyers will still struggle to get on the property ladder even if house prices fall significantly, according to a think tank.
Falling incomes and the tightening up of mortgage lending criteria could make getting on the property ladder as hard as it was before the crisis, the Resolution Foundation said.
Lower deposit deals have disappeared particularly quickly from the mortgage market in recent months amid concerns that borrowers in this bracket would be at particular risk of falling into negative equity if house prices fall. This means they would owe more on their loan than their house is worth.
The Foundation said that back in the 1990s, a typical young couple putting away 5% of their income each year could save enough for a deposit in four years. As house prices have surged over the decades, by 2019, that figure had increased to 21 years.
Looking ahead, the Foundation said that because any potential house price falls triggered by the coronavirus recession would come hand-in-hand with falls in income, the impact on the time the average first-time buyer family needs to save for a deposit would be negligible.
It also said that many renters have been forced to dig into their savings since the pandemic started, making the task of saving for a deposit to get on the property ladder even harder.
The Foundation estimates that if the average first-time buyer loan-to-value ratio fell to 80%, the level seen in the wake of the financial crisis, by 2024 it could take 27 years to save for a deposit – even if house prices were to fall significantly.
The Foundation’s work is focused on improving living standards for people on low to middle incomes.
Lindsay Judge, principal research and policy analyst at the Resolution Foundation, said: 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.
She said, although prices are projected to fall – perhaps dramatically – 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. 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 said.
She said, 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.
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