Finally the plight of first-time house movers hits the national headlines
Hallelujah! The plight of trapped first-time house movers has finally got into the national headlines.
Recent research undertaken by Lloyds Banking Group exposes the problem of increasing numbers of financially-constrained first-time homeowners trapped and unable to make the second step up the ladder.
The banking group reckons that affordability among second steppers, as the bank calls them, to make a house move is at its lowest level for 25 years. And the research threw out numbers for how bad it is in each region.
Intriguingly, the research suggests that it’s tougher in terms of affordability for second-steppers than for first-time buyers.
Given the amount of attention lavished by politicians, estate agents and a bevy of experts on the plight of first-time buyers, the Lloyds findings might sound like rather shocking news.
Might it be that the big problem with the housing market isn’t first-time buyers then?
Well, no, and it hasn’t been the “big problem” for a few years in my view. First-time buyers are yesterday’s big problem, or should I say one that goes back a decade or so.
There has been for many years a “hidden” and growing problem with trapped first-time homeowners, or second-steppers if you prefer.
So I welcome this research and highlighting the plight of the trapped second-stepper.
But I found the interpretation of the research to be unsettling and, to be honest, irritating.
Before examining that interpretation, it’s worth saying that you did not need to do any particularly detailed consumer research to know that there was a potentially huge problem in this sector of the housing market.
Sat on a couch armed with a moderately functioning brain, a few bits of paper and a pencil, some modestly robust assumptions, a few widely available stats, a reasonable aptitude for maths and, most importantly, an inclination you could, at any point over the past few years, have done sums that would have revealed the lot of first-time homeowners as a potentially very scary problem.
Indeed, two years ago, having become increasingly concerned about the potential effects on the housing market of sustained low interest rates and low inflation, I did some sums. I cheated though and used Excel rather than pencil and paper and sat at my desk rather than on the couch.
Anyway, it had become tricky to avoid noticing in the housing data that something was amiss. For instance, the figure for the median earnings of house movers was rising far faster than the UK median earnings.
Either rising earnings were encouraging richer people to move more frequently, or home-moving was increasingly confined to the better off. On the grounds that transactions were falling, the latter seemed the more plausible.
I had been arguing for some while that the stagnant housing market was “more a problem of first-time movers than first-time buyers”. So I decided to do a stylised example of the experience of a notional first-time homeowner (second-stepper).
The sums (based on what I think were reasonably robust assumptions given what I was trying to do) suggested that the average time it would take for a first-time buyer to be in a comfortable position to trade up had doubled from four years in the 1980s to eight years in the 2000s.
Naturally this was stylised, but it illustrated a simple point. When wage inflation is relatively high and interest rates are also high the cost of buying a home is front-end loaded and the price of homes are, broadly speaking, lower.
In these circumstances house prices in nominal terms can comfortably rise at the pace of earnings or slightly faster and in doing so first-time buyers quickly build the equity needed to fund their next move. This was the basis for the housing gold rush in the 1980s.
But this effect is significantly less pronounced in an economy with low wage inflation and low interest rates. It takes longer to build equity and the house price to earnings ratio expands increasing the equity needed to trade up.
So to be told that there is a problem with second-steppers should hardly be a surprise to anyone with a basic grasp of how the market works, given that the economy has exhibited the traits of relatively low wage inflation and low interest rates for a sustained period.
What is more, the implications of a lengthening in the time between buying a first home and buying a second home were and remain clear – fewer transactions.
This problem will only be exaggerated by the downward pressure on real wages.
But to accept this analysis means to take on board some uncomfortable policy problems.
One of these is to accept that house prices are just way too high. This in fairness Grant Shapps, the housing minister, has broadly accepted. And well done to him for that. But his “solution” is the gradual whittling away of real house prices by wage inflation. That’s hardly a full-frontal attack.
Another prickly policy problem is that to accept the notion that a large number of second-steppers are trapped kind of implies that to encourage yet more first-time buyers onto the housing ladder with market distorting programmes simply compounds the issue and so might well be, well, what’s the word…stupid.
But more difficult for the industry at large, I suspect, is that this research, for what it is worth, delivers a kick to the cosy, widely-accepted and unchallenged assumption that if we can just get first-time buyers buying again all will be well.
So it’s good that a spotlight has been turned on this troublesome and hugely challenging problem in the housing market.
So, well done for that Lloyds.
However, what is extremely disturbing, to me at least, is that the conclusions being drawn by Lloyds from this research are not well founded.
Certainly, there appears to be too many lazy assertions in the document Second Steppers: The challenges facing those moving up the ladder. This is pretty worrying given that Lloyds has more financial interest in housing than almost any other bank on the planet.
I was genuinely shocked to read: “Crucially, for every Second Stepper that can’t move on, there’s a First Time Buyer not getting on the ladder.”
That’s just rubbish. It appears to have been written by a marketing person or team of them with shamefully little understanding of the housing market.
More worrying is the implication in that statement that first-time buyers are being in some way thwarted in their attempts to buy because of second steppers inability to move. What about new homes, built and designed for first-time buyers?
If there were a backlog of frustrated first-time buyers gagging to get on the housing ladder, don’t you think house builders would be gearing up to supply them with brand new purpose-built homes rather than banging on the doors of ministers convincing them to devise a mortgage guarantee scheme.
Just for those who keep forgetting. The collapse in first-time buyers began in 2003. At the time average mortgage rates were falling and the terms for getting them were, well, how can I put this without getting sued? Let’s settle on pretty slack.
If you want to understand why the market for first-time buyers was kyboshed I don’t think you need look much beyond the near doubling of house prices within five years.
But to end on a positive note, let us hope more work is done on the plight of first-time movers and more attention is paid to this fundamental flaw in the housing market.