Monday, 24 December 2007

First time buyers have disappeared

The UK housing market has become a speculative merry-go-round. There are virtually no first time buyers in the market.

What accounts for the vast majority of home sales these days? People who own property are selling their overpriced properties to other people owning property. The market is now driven by speculators trying to squeeze out capital gains from each other, with transactions being financed by banks.

The statistics on disappearance of first time buyers are shocking:

  • Average house prices are unaffordable for first time buyers in 466 out of 483 towns
  • In 2007, the average first time buyer in 8 out of 12 UK regions paid stamp duty.
  • The number of first time buyers is at its lowest since 1980.
  • An estimated 300,000 first time buyers entered the market in 2007 - 44% less than in 2002 (532,000).
  • First time buyers cannot afford to purchase a terraced property - traditionally the least expensive property type - in 71% of towns across the UK. Back in 2002, the typical first time buyer could not afford to purchase a terrace in only 11% of towns across the UK (51 towns).

  • However, the merry-go-round is about to spin off its axle. The crash is here.


    Budvar said...

    !st time buyers are the foundations of the property pyramid, take those away, and the whole edifice comes crashing down.

    Josh said...

    FTBs gone; and a market dominated by BTLers. That sounds really healthy.

    Dave B said...

    Don't worry, by next xmas, the BTLers will be desperately selling their crashing investments to first time buyers.

    speedtheplow said...

    There will be no crash until interest rates go up. And as they are being brought down with superabundant liquidity provided by the central banks--no crash. I'm afraid that all the wishing in the world will not bring this mountain of debt down. Look at the rally on Wall Street for your lead as to direction of markets in New Year.

    Budvar said...

    Speedy, you can chant the mantra "Housing only crashes when interest rates rise" as much as you like, it doesn't necessarily make it so.

    Yes it was interest rate rises that facilitated the last 2 housing crashes, but as I've said before it's "Affordability" that causes crashes (ie the ability to make the payments) and it was higher interest rates that was the mechanism that caused the said unaffordability.

    As to your comment regarding Wall St rallies and their direction in the new year, it's a fools rally, and once new year bonuses have been locked in, watch it plummet like a millstone tied to a sack of kittens thrown in the canal!!

    01/20/2009 end of an error said...

    Interest rates are at historical lows yet the housing market is teetering. Even if the FED BOE or ECB go to zero rates will not drop below 4%. They only went to 5.25 at the lowest last time in the USA for a 30 year fixed.

    Face it the economies of the world are run on debt. Now the credit factory is losing steam and the fall out will be spectacular.

    The other thing that ran housing prices up was phychology. That has also changed and once changed is hard to change back. Anybody want some stock???

    Anonymous said...


    I think you are right to think that a hike in interest rates will be the spark that will end the bubble. However, it is important to recognise the three channels which, under normal circumstances, interest rate affect housing prices.

    First, rising interest rates would lead to an economic slowdown. This would generate higher unemployment, and therefore more repossessions. This would lead to lower prices.

    Second, higher rates would mean higher repayments on new mortgages. This would lead to lower demand, and therefore lower house prices.

    Third, an interest rate hike would raise repayments on variable rate mortgages. As repayments rise, defaults would increase and put downward pressure on prices.

    Since rates are not rising, I can understand why you think that prices won't crash.

    However, we are not in normal times. Mortgage lenders are having difficulty in raising funds to finance new mortgages. Therefore, the supply of new financing has more or less collapsed. For many new borrowers, this amounts to a de facto massive hike in interest rates. Of course, it is not possible to see this hike down at the high street bank. But in reality, this means that the market is likely to crash.

    So, in summary, your logic is correct, but you need to factor in how for many borrowers, rates have actually risen, while the BoE base rate is falling. It is weird, I know, but rates are both rising and falling

    Anonymous said...

    Speedtheplow - I'll see your
    "There will be no crash until interest rates go up" and raise you 650 trillion dollars of derivitives debt being written off

    speedtheplow said...

    Thanks, Anon. I understand what it happening in the borrowing market--interest rates are low but actual borrowing costs are now higher, and therefore lending has slowed down. But liquidity has once again been opened up to full gush by the central banks and you and I both know that if they continue to hold open the faucet the market might well recover...The average Brit has absolutely no idea what is going on and is still easy meat for the usurers.

    Anonymous said...


    Its anon again here. I would like to follow up on your recent interesting comment, since I think it goes to the "heart of the issue". What is the issue? What impact will all that recent liquidity have on banking sector behaviour?

    The recent surge in liquidity is what central bankers refer to as "high powered money". What will drive a further surge house prices will be an increase in "broad money". The relationship between the two - high powered money and broad money is the money multiplier.

    I think your view could be best characterized as one where the money multiplier will remain constant and this additional liquidity will translate into very fast credit growth. All this extra money will keep house prices growing. Although, I know you would like to see the housing market crash, this view is in fact what the BoE wants (and probably expects).

    Alternatively, this surge in high powered money may not result in an increase in broad money. Hence we would have the somewhat unusual situation where the base rate would come down, but mortgage rates would go up and mortgage availability would decline. This would lead, in all probability, lead to a housing crash.

    So which scenario will prevail. At this stage, it is probably too early to tell. However, I can tell you where to look for the answer. Watch the BoE's broad money aggregages - for example, M4. If this number slows, then we are probably looking at a crash. If it keeps growing, then the housing market is safe, at least for the moment.


    speedtheplow said...

    Anon, thanks for the lesson. Bottom line: the crash we want and need (if only to ratify the laws of economics) may well never happen. And if it doesn't--will there ever be a market (of any sort) crash again?

    Anonymous said...

    Speedtheplow: "And if it doesn't--will there ever be a market (of any sort) crash again?"

    If governments (the US UK EUR ) are essentially printing money to stave off the credit collapse - surely that just means instead of being screwed by a credit collapse we get screwed by hyperinflation instead.