Ladder lengthens for first-time buyers
Across the western world, the severity of any slowdown in the housing market is likely to be determined by one group: first-time buyers aged between 25 and 35.
Young adults are traditionally a bedrock of thriving housing markets. In the UK, for example, the Council of Mortgage Lenders says that, historically, young homeowners putting their first feet on the property ladder accounted for half of all house purchases. Last year, however, the number fell to a record low of 29 per cent as rising property prices put the cost of a new home out of reach to the majority. Indeed, according to the Halifax, the UK\'s largest mortgage lender, 80 per cent of Britain\'s 667 main towns were unaffordable for most people hoping to buy their first home last year.
The number of first-time buyers - 359,000 last year according to the Halifax - may understate the extent of the crisis for homeowners because the figures include those who have taken out their first mortgage, even if they have owned property previously. On the other hand, the ageing of the "baby boom" generation means the absolute number of 25- to 35-year-olds in western countries has shrunk, which is likely to depress statistics. Wider university access and later marriage also help explain why the average age of first-time buyers is increasing.
Those who forecast a sharp decline in housing markets argue that the shortage of new homeowners may eventually be a catalyst, especially if they stage a "buyer\'s strike" when prices begin to fall, believing that the longer they wait, the more affordable a new home will become.
Unless interest rates rise steeply, says Alex Bannister, the Nationwide\'s group economist, there is enough pent-up demand to stop prices collapsing.
Mr Bannister argues that while the dearth of first-time buyers is putting the brake on inflation, it may turn out to be a boon for the housing market. It means borr owers and lenders are being more prudent than they were during the late 1980s crash, leaving them less exposed if prices fall.
In the US, the broad message is that affordability for first-time buyers has already been undermined. Mortgages are often tied to 10-year yields rather than to the Fed funds rate. As a result, the expectation of higher Fed funds rates started to push up mortgage financing costs long before the Federal Reserve increased interest rates.
Since banks lend largely on the basis of the affordability of monthly repayments rather than a strict multiple of earnings, it has already started to become more difficult for first-time buyers to enter the the housing market. Not only have prices been galloping out of their reach but the banks have started to lend less than they did earlier in the year.
In spite of this, housing market activity has been accelerating recently as Americans try to lock in historically low interest rates. Indeed, "lenders have been pretty creative about helping first-time buyers clamber on to the housing ladder by offering less traditional loans," says Mark Zandi, chief economist at Economy.com, the consultancy. "Those who had been sitting on the fence have been piling into the market before rates head up further."
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