Opinion: first-time buyers may struggle despite falling house prices

Falling house prices may not be the boon for wannabe first-time homebuyers that they appear.

You probably won’t be surprised to hear that house prices have taken a knock as a result of coronavirus.

According to the latest index from Nationwide, average house prices dropped 1.7% in May, to an average of £218,902. That’s the largest single month fall in 11 years.

And as a result, annual growth has plummeted from 3.7% in the 12 months to April to 1.8% now. Don’t be surprised if that plunges into the red next month either.

It’s understandable of course. Lots of home movers have had to pause their purchases due to the UK lockdown, while others who were just starting their new home hunt have paused the search indefinitely.

And as demand drops, so do the prices vendors can ask for.

Obviously, house price falls aren’t great news for homeowners, as it raises the spectre of negative equity, where the outstanding mortgage is greater than the value of the property.

But given the way that house prices have risen in recent years, making home ownership feel like an impossible dream for thousands of wannabe first-time buyers, you might think this would help them get onto the ladder.

Unfortunately, the reality may be rather different.

The changes to the mortgage market

There is no getting away from the fact that the mortgage market has gone through a tumultuous time as a result of the COVID-19 pandemic.

The changes in the numbers of products available have been striking. The latest data from mortgage technology firm Mortgage Brain shows that last week there were 8,635 different mortgage deals available from the industry’s various lenders. 

While this figure has been on the rise for the last four straight weeks, and are now 16% higher than the lowest point seen in the last few months, they remain a massive 41% down on the average numbers seen in the two months before coronavirus hit.

And that reduced level of choice is far from great news for prospective borrowers.

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Less choice for those with small deposits

It’s not just that the sheer numbers are down, but the types of mortgage that have disappeared which are a concern.

Understandably, lenders were quick to pull higher loan-to-value mortgages, given the greater level of risk associated with them.

But it means that borrowers with small deposits face slim pickings when looking for a loan, particularly when compared to the level of choice open to borrowers with more substantial deposits.

And then there is the fact that it’s the specialist lenders, the ones who are most understanding of borrowers with slightly different circumstances ‒ such as being self-employed ‒ who have stripped back their lending to the greatest degree. 

In other words, if you’re a buyer with a chunky deposit and a straightforward income, then things are likely to look far more rosy for you in the months ahead than if you have a more modest deposit and you work for yourself.

Look the other way

There’s also the sad fact that plenty of people who thought they were in a good position to purchase a first home, or move up the ladder, are now trying to pick up the pieces of their wrecked finances.

This pandemic has wreaked havoc on our money, with unemployment set to rocket. Indeed, more than 2.1 million people were claiming unemployment benefits in April, having jumped by 70% in the preceding three months, and that’s only about to get worse.

Even those who have kept their jobs may have had to drop into their overdrafts, take on more borrowing, or make use of the money earmarked for a deposit in order to get by.

So even if house prices do fall, there will be an awful lot of would-be buyers who are simply no longer in a position to take advantage.

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Don’t forget the downsizers

There’s more to the housing market than simply those hoping to purchase a first home or move up the ladder too.

The whole thing relies on older people, whose children have grown up and flown the nest, downsizing to a smaller property, opening up those larger homes for the younger families that need them.

But a lot of older people rely on the funds left over from downsizing to support them in their retirement, to supplement whatever money they have put aside in private pensions to ensure they enjoy relative comfort in their twilight years.

And if house prices do drop more sharply, then they face a smaller chunk of cash left over. This could mean they instead opt to hold steady in the hope of prices recovering, meaning even fewer options for those looking for a bigger property.

Only time will tell precisely how the housing market moves in the post-lockdown world, and whether prospects improve for buyers and sellers alike.

But there are an awful lot of people whose hopes of a home move in 2020 have been dashed.

Coronavirus: homebuyers 'should postpone deals' as mortgage lenders drop products