What next for first-time buyers?
Earlier this year, Lacey and Gary Riger finally gave up looking for their first home. After a long search, the couple, who are in their thirties, had found a house on Long Island that was large enough to accommodate them and their two children. It was on the market for $1.1mn, a price they thought they could afford.
Then, their mortgage broker told them the best interest rate he could get on their 90 per cent LTV mortgage was 8.5 per cent, which would mean switching from $5,000 per month in rent to $7,000 per month on a mortgage. “But it was worse than that,” says Lacey. Because they were both self-employed — Lacey is a commercial insurance broker, Gary owns a small tech company — they would need to show the bank that, in addition to the 10 per cent deposit, plus all the closing costs and the mortgage insurance, they had the first year’s mortgage payments in cash.
It all felt like too much of an ask. “It’s just not worth it to be stretching myself so thin,” says Lacey. And buying a smaller house, or one further from their parents, felt like a compromise the couple did not want to make.
110%Increase in salary required to buy the average starter home in the US in three years
So they signed a two-year lease on a rental home. “I’d rather rent, for now,” she says. “Maybe we can save for a bigger downpayment, or maybe rates will fall.”
For the past 12 months, first-time buyers in many parts of the world have faced their toughest conditions in years, thanks to higher interest rates, reduced access to credit, resolutely rising property prices in some cities, and increasing rents, which are hampering their ability to save for a deposit.
Their numbers in the US are lower than at any point since at least 2009; in the UK — excepting the pandemic year of 2020 — they are their lowest since 2013. As would-be homebuyers look to the new year, many are asking if and what they can afford to buy — and whether home ownership still makes financial sense.
In the UK, Laura Ulanowski has little hope she will be able to buy in 2024. Just 18 months ago, it was a different story: she was about to purchase her first home, in Brighton, having secured a mortgage rate below 2 per cent.
But the sale fell through. Then a second fell though. And, like many, her chance to buy was upended by rapidly rising interest rates, triggered first by the former prime minister Liz Truss’s “mini” Budget last September, and then by worse than expected inflation data released this spring.
When the second sale fell through, “I didn’t even bother looking for a new mortgage,” says Ulanowski. “After the money I’d spent on two surveys and the legal costs, there was just no way.”
The average interest rate in the UK for a two-year fixed mortgage at 90 per cent LTV last week was 5.98 per cent, according to the financial information company Moneyfacts. That’s down from the peak in July, but still significantly higher than what Ulanowski secured last year.
Back then, she was expecting to pay £800 per month in mortgage payments. At last week’s average rate, this would rise to £1,367 per month. If she keeps her payments the same, the amount she can borrow drops by two-thirds.
Mortgage rates are coming down, but not as far or as fast as they need to to help buyers such as Ulanowski. Interest rates are widely believed to be at their peak. The Federal Reserve, the European Central Bank and the Bank of England all held interest rates steady at their meetings this week.
“But mortgage rates between 4 per cent and 6 per cent are likely to be the new normal over the next five years,” says Noble Francis, professor of construction economics at UCL, who points to the decade before the financial crisis, when they were at the upper end of this range.
Ulanowski still gets alerts for properties that come up for sale and tries to keep an eye on the market. “But, for now, I’ve given up the idea of buying a home,” she says.
In the US, where mortgages typically have much longer terms than in the UK, the average 30-year fixed rate mortgage reached 7.8 per cent in November, and this week stood at 7.0 per cent.
The income needed to buy the average-priced starter home of $346,000, with a 10 per cent deposit, has more than doubled since 2020, to a little over $103,000, according to the National Association of Realtors (NAR).
“By our measures, it is harder to afford a first home purchase than at any time since the 1980s,” says Jessica Lautz, deputy chief economist and vice-president of research at NAR.
First-time buyers must also choose from fewer mortgages, and are less likely to qualify, says Jonathan Miller, professor of residential real estate at Columbia University in New York. “Since mortgage rates began to rise, credit conditions have tightened, making banks less flexible on mortgage terms.”
Unlike in the UK, fixed-rate mortgages in the US are typically not “portable” — or transferable from one home to the next. This makes homeowners reluctant to surrender their low rates by moving. “As long as moving means a jump in borrowing costs, there will be a shortage of homes for sale, keeping prices high,” says Miller.
Price gains in certain US cities have far outstripped the national average, which is up 6.7 per cent since its January low, according to the S&P Case-Shiller national index.
61%Proportion of UK first-time buyers receiving financial assistance from family members, up from 46 per cent last year, according to estate agent Savills
Two years ago, in Miami Beach, Adina and David Barouche offered the $1.2mn list price for a family home and were outbid by $80,000. Today, the couple is trying to buy a nearby house for $2mn. “It’s a similar home, the same size, 10 homes away on the same street,” says David. This one will end up even more expensive because it needs significant work, adds Adina. “It’s pretty terrifying.”
In Australia, property prices have increased by 7 per cent in the past year, according to financial services company CoreLogic, and in some cases, homes are going for significantly more than their guide prices.
In Melbourne, Morgan Pickett and his wife recently attended an auction for a house with a guide price between A$800,000 and A$850,000 ($525,000-$557,000). It sold for A$1.01mn, 18 per cent more than the upper limit. “Every few months, our expectation of the house we can afford diminishes,” he says.
It’s not just the price of homes and the cost of borrowing that will determine what first-time buyers do next. Other financial commitments are making saving for a deposit increasingly difficult.
“When we survey recent buyers and ask them why it took so long for them to purchase their first home, consistently the top two reasons are high rents and student loan debt,” says Lautz.
Both pressures are set to continue — or even intensify — next year, in the US and beyond. A pandemic-era moratorium on US student loan repayments, which helped first-time buyers save for a deposit, expired in October.
In Australia, rising interest rates on his student loan means that Pickett is paying more each month than when he left university in 2017. “It’s weird to have been in the workforce for six years, with significant salary increases, but be paying more than when I started,” he says.
Rapidly rising rental prices have been an ongoing problem in many cities since the end of Covid lockdowns. In New York, the median rent for a one-bedroom apartment is $3,995 per month, according to the Rent Hop marketplace website — up 55 per cent since 2020 and 17 per cent higher than the pre-pandemic peak. In inner London, rents have climbed 13 per cent in a year, according to Hamptons estate agents. In the first six months of 2023, Berlin’s average asking rent was up 17 per cent year-on-year, according to JLL.
Marguerite Dussert, 27, who arrived in Marseille from Brussels recently to start a new job, is currently staying on friends’ couches and in spare rooms. “Finding a place to live has proved to be a major challenge,” she says. “Prices are higher than I expected, there are very few homes advertised within my budget and those that are advertised rent very quickly.”
The city’s high rents are likely to push back her plan to buy a home. “Buying a house in the future is certainly a goal, but saving for it is becoming increasingly challenging.”
In Melbourne, where the average apartment rent increased 12 per cent in the year to November, the fear of unaffordable rent rises is delaying the plans of Nellie Malseed and her partner to start a family.
“Settling down implies you know where you are living for the next few years and that’s just [not possible] now,” she says. “I have friends who have had to move annually for the first few years of their child’s life because their rent increases were so high. I can’t think of anything worse.”
In 2021, the couple agreed a two-year plan with their financial adviser to save for the one-bedroom home they wanted to buy within a half-hour commute of their jobs.
Five years out of university, the couple had saved hard from their combined income of $140,000, despite sizeable university debts, and could build the deposit they needed in a year. But they decided to save for two years, to end up with a smaller mortgage that they could pay off quicker. “Our financial planner agreed: if we were happy renting for an extra year, in the long run, we’d save,” she says.
Today, thanks to rising mortgage rates and Melbourne’s fast-appreciating home prices in the last year, they have instead abandoned their plan to buy a home together entirely.
“I look at my bank account and think: what am I saving for? Honestly, I don’t know any more,” she says.
Across Europe, new home building is falling sharply, which will only increase the pressure on rents and prices. According to Noble Francis, house building in the UK will fall 19 per cent this year and remain flat next year. “This means that even in the medium-term, supply is likely to be tight, sustaining prices and continuing to make it challenging for first-time buyers,” he says.
At the same time, support from the UK government designed to help first-time buyers is having limited impact.
Many look to the Mortgage Guarantee Scheme, introduced in 2021 to increase the supply of 5 per cent deposit mortgages, to fill the gap left by the Help to Buy equity loan scheme, which ended in March this year.
However, since the new scheme was introduced, fewer than 1 per cent of new UK mortgages have used it, according to the Treasury.
Tom Clayton, 32, needs to find a home in London for less than £450,000, to realise the 25 per cent bonus when he cashes in his Lifetime Isa, a tax-efficient savings plan for first-time buyers. Including the bonus, he has saved £100,000 for his deposit (although it’s not all in the Lisa).
He can’t find anything suitable, so has been looking further out, meaning a lengthy commute to work each way. But even here, the home he found meant paying £2,000 per month on a mortgage and service charge, compared to the £1,300 he currently pays in rent. He can just afford it, but the financial risks would be too great, he says.
“All my wealth would then be in my home and I don’t see property as the safe investment it has been for the last few decades.” Unlike a large and growing number of first-time buyers who rely on support from the bank of mum and dad in the UK, Clayton says he has no one to help financially if things go wrong.
“I’m hoping for a fall in prices, a fall in mortgage rates or a large bonus from work that would increase my deposit — but really it’s interest rates that dominate everything.”
For now he is in limbo, having found a room to rent in a shared house last summer through SpareRoom, after his landlord refused to renew the tenancy on the flat he was renting, two weeks before it ended. “This is a very unstable situation. I do want to buy. It’s the uncertainty as much as anything that is hard.”
426,000Fewer first-time buyers in the UK over the next five years, compared with 40-year average, according to Leeds Building Society
“Without a secure home within reach, younger people are finding it much harder to put down roots and plan for their future,” says Darren Baxter, principal policy adviser at The Joseph Rowntree Foundation, a UK charity that conducts research into poverty. “The economic insecurity being driven by our housing market puts younger people and families, and therefore our country’s future economic prospects, in serious difficulty.”
Francis expects new measures to be introduced in the UK in 2024. “Housing is rising up the political agenda. With a general election next year and with both major political parties having ambitions to increase home ownership, whoever is in power will be focusing on how we can increase the supply of homes and increase affordability,” he says.
“I am not sure this is a long-term situation,” says Miller of the impasse first-time buyers face in the US. But he admits that only a steep fall in mortgage rates — a remote prospect — would bring prices down.
In Melbourne, Pickett is steadily trimming his ambitions for the home he will raise a family in, while peers just a few years ahead of him in high school who were able to make a purchase are now vastly better off.
“Every few months the size of the plot is shrinking, the house is getting older and further from the centre of the city,” he says. “Things have changed completely in a matter of a few years. If we bought a home just before the pandemic, ours would be a different world.”
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