First-time buyers market shrinks as trading up owners don’t sell

First-time buyers are being denied the chance to get on the property ladder because home owners are renting out rather than selling properties at the cheaper end of the market when trading up.

Following the 2008 credit crunch, first-time buyers have had to put down larger deposits to get a mortgage. This has often been given as the main reason for them struggling to get on the property ladder since that time.

But new research from the London School of Economics (LSE) reveals another reason.

first time buyers New research from the LSE suggests entry-level houses are less available for first-time buyers because owners are not selling them when trading up. Image: pixabay.

Felipe Carozzi, of LSE’s Department of Geography and Environment, analyzed 12 million private housing transactions conducted in England and Wales between 1995 and 2013.

He found that while house prices and sales fell across the United Kingdom during the housing slump of 2008-2009, sales volumes were even lower at the cheaper end of the market.

He also found the proportion of renters rose from 12.8 percent to 16.4 percent during 2008-2012, and the reduction in number of houses sold was steeper in areas where renting increased.

‘Accidental landlords’

These findings suggest the increase in rented homes was not a result of buy-to-let but rather because of “let-to-buy” decisions by home owners who become “accidental landlords,” as the LSE report explains:

“Greater down-payment requirements hinder housing purchases by young households with less wealth. In turn, older and wealthier households become ‘accidental landlords’ who keep their previous home and rent it when moving up the housing ladder.”

This makes sense in that wealthier owners who were first time buyers before the slump are likely to wait until prices pick up before selling, and are also in a better position to buy their next house while prices are low.

Dr. Carozzi says his study sheds light on why the mix of transactions changes during periods of boom and bust. The mix was stable during 2000-2007, but then there was a “strong and persistent change.”

“This coincided with the sharp reduction in the availability of high loan-to-value mortgages to first-time buyers but also fewer entry-level houses coming onto the market,” he adds.

Decline in home ownership

The research follows another recently published report that concludes wealth building is harder for today’s young adults, and gives decline in home ownership as one reason.

Meanwhile, the Government has announced it is scrapping its Help to Buy mortgage guarantee scheme for first time buyers.

Under the scheme, first-time buyers could take out a government-backed loan worth up to 95 percent of the value of the property they wished to buy.

The scheme was set up by the previous chancellor George Osborne in 2013. His successor, Philip Hammond says its “specific purpose” has been “successfully” achieved in that there are now over 30 commercial lenders offering loans outside it.

The Help-to-Buy mortgage guarantee scheme is one of four Help to Buy government-backed schemes intended to help first-time buyers. The other three will continue until 2020.