The availability of high loan-to-value mortgages has dropped sharply, and the cost of those that are still available has rocketed. So it’s remarkable that the share of mortgage advances going to first-time buyers hasn’t dropped. We put it down to the surge in household saving during lockdowns. Another jump in saving in the latest lockdown suggests that first-time buyer demand will be resilient this year.
- The availability of high loan-to-value mortgages has dropped sharply, and the cost of those that are still available has rocketed. So it’s remarkable that the share of mortgage advances going to first-time buyers hasn’t dropped. We put it down to the surge in household saving during lockdowns. Another jump in saving in the latest lockdown suggests that first-time buyer demand will be resilient this year.
- Despite high loan-to-value (LTV) mortgages that many first-time buyers rely on becoming dearer and scarcer, the share of new mortgages advanced to first-time buyers (FTBs) has not dropped. The number of 90%+ LTV products available is still only a fraction of its pre-pandemic level. And the interest rate on the 90% LTV mortgages that are available has risen from 1.9% to 3.7%. (See Chart 1.) But data from lenders collected by the Bank of England show that FTBs still accounted for a third of total mortgage advances for house purchase in Q3 2020, the same as in 2019.
- Rather than delaying their purchase, FTBs have increased the size of their deposits, and in most cases accepted higher interest rates too. Data from Halifax show that the average FTB deposit has risen by over £10,000, from £46,449 in 2019 to £57,278 in 2020. That pushed up the average deposit size up from 19.9% of the house price to 22.4%. Meanwhile, despite the jump in interest rates on high LTV loans, 3.5% of mortgages were extended at over 90% LTV (albeit down from 5.4% in 2019).
- The ability of FTBs to increase the size of their deposits has been reinforced by the stamp duty holiday. FTBs already benefit from stamp duty relief on the first £300,000 of the purchase price, but the additional relief on the value between £300,000 and £500,000 will have led to savings (and reduced borrowing) in many cases, particularly in London and the South East.
- Deposit amounts have surged in all regions though, so we think that the main factor is the acceleration in household saving due to the sudden drop in expenditure during lockdown. The proportion of households’ disposable income saved nationally rose from 7% in 2019 to 27% in Q2 2020, which was the highest since records began in 1963 by some margin. (See Chart 2.)
- What’s more, First Time Buyers are typically in high income groups whose finances have benefitted the most from COVID-19 restrictions. Over 60% of first-time buyers are in the top 40% of the income distribution, where survey data from the Bank of England shows that the improvement in household finances has been greatest. (See here.)
- Saving rocketed again even before the current lockdown began in January, suggesting that more prospective FTBs will be able to amass large deposits. (See Chart 2 again.) So FTB demand should remain resilient to elevated interest rates on high LTV lending and high deposit requirements in early 2021.
- We doubt this will fully offset the drag on the housing market from the end of the stamp duty holiday, rising unemployment, and the withdrawal of policy support. It is, however, another good reason to think that the drop in house prices this year to be limited. We expect a 4% y/y dip after the 6.5% rise in 2020.
Chart : Mortgage Availability & Interest Rates
Chart : Household Saving & Cash Holdings
Sources: Moneyfacts.co.uk, BoE, Refinitiv, Capital Economics
Sources: BoE, ONS, Refinitiv, Capital Economics
Andrew Wishart, Property Economist, +44 (0)7427 682 411, firstname.lastname@example.org