Like a giant pyramid scheme, the housing market relies on first-time buyers to enable those already on the bottom rung of the ladder to sell their starter homes and climb higher. New blood is needed for the additional funds that will keep the market buoyant.
Yet this vital source of investment has all but dried up. The number of first-timers this year could be the lowest on record. In 1999, almost 600,000 people bought their first property, but then soaring prices started to make homes unaffordable and that number dropped steadily. Last year it stood at 358,000 – its lowest level since 1991.
However, with prices now falling, potential first-timers are still not taking the plunge even though properties are cheaper. On current trends, they will buy barely more than 200,000 homes this year. Indeed, the total could fall below the 198,000 sales recorded in 1974 and be the lowest since records began.
That non-owners are not buying is evident to every housebuilder with unsold stock and every estate agent looking for commission. The debate is whether demand from first-timers has dried up or whether the supply of mortgages has disappeared.
Sue Anderson, spokeswoman at the Council of Mortgage Lenders (CML), puts up her hands and admits her members cannot provide the loans. "We don't see this as a demand-led reduction but a funding problem," she confesses. "At the moment it's still seen as very much a supply-side problem."
But not all lenders accept the blame. Fionnuala Earley, chief economist at Nationwide, Britain's biggest building society, says: "Affordability was beginning to bite before we had the trigger of the credit crunch. In the short term, the demand factors will dominate. People are not in a position to buy and that's likely to be the case for some time."
Would-be first-timers have switched quickly from being unable to afford an asset whose price kept rising, to being unwilling to buy one that is falling. The housing market, once a sure-fire bet, is now a guaranteed short-term way to lose money, and for highly geared first-timers a small price fall represents a major erosion of their equity.
Despite the tougher lending conditions imposed since the credit crunch, those first-timers prepared to enter the market are borrowing, on average, 87 per cent of the value of the property, which means finding a £17,000 deposit to put down on a typical UK first-time buy (whose selling price is down to £130,000). The average age of these buyers, at just 28, and the size of the loans they take out, 3.3 times income, suggest that credit is not always hard to come by. But the 8 per cent fall in prices since last autumn has already wiped out most of the equity of the first-timers who bought then. The rest could disappear by Christmas.
So it is hardly surprising that many are not buying. First-timers once accounted for the vast majority of purchases but are now only about a third of a housing market, which is itself shrinking rapidly. Mortgage approvals for house purchases are running at half last year's rate, reflecting a fall in sales that makes the property market less liquid. Sales take longer when there are fewer potential purchasers, forcing sellers to slash prices or take their home off the market, thus further restricting buyers' choice.
Ms Earley at Nationwide says: "Those people who do not need to move will not do so. People who do want to move will find it more difficult to complete their chains and they may need to cut their prices."
Estate agents forecast selling 30 to 40 per cent fewer properties this year. With lower prices, that could almost halve their commission income, even though the extra effort required to sell in such a market increases costs. Branches are being closed, agents laid off and some, like Humberts, have called in administrators.
The housebuilding industry, meanwhile, is urgently curtailing output to reflect the lower demand and introducing incentives to help sell completed homes. Many builders will pay their buyers' stamp duty, loan fees, legal and survey costs and waive the demand for a mortgage deposit. Some have gone further still. Crest Nicholson, for example, offers an interest-free loan on a quarter of the sale price for five years on some sites, while rival Taylor Wimpey is now offering a similar deal over 10 years.
But if reluctant buyers still fear prices will fall, even those sort of deals won't pull them in. So builders have stopped building, cutting starts on new private homes by a third this year. April's 7,981 new starts was the lowest since records began in 1986 and suggests annual output could plunge below 100,000. By comparison, the industry was recently constructing about 160,000 homes a year.
Yet the demand for domestic property continues to rise. Ministers have set a goal of 240,000 new homes a year by 2016 and three million extra properties by 2020. But Ms Earley points out: "It seems very unlikely the government housebuilding targets can stay where they are. Once you have a severe contraction in the industry, you cannot just gear up again."
Dozens of small building companies have already gone bust and some large ones could follow. But administrators are adopting the same policies as the firms' managers – generate cash through promotions, stop building and stop buying land. Falling property markets hit land values especially hard because sites have a residual value – the difference between a house's selling price and its building cost. If the fixed costs are two-thirds of the total, a 10 per cent fall in the selling price cuts the land value by 30 per cent.
Big writedowns on landbanks are expected, and several builders need new capital to satisfy the banks which financed buying that land. But ironically, the banks' own recent, massive rights issues – sometimes botched – have made it harder for others to issue shares. However, banks will be unwilling to accept debt-for-equity swaps to ease the builders' gearing; bad loans on their battered balance sheets are still preferable to shares in near-bankrupt builders.
And the banks also face writedowns on loans to homebuyers who are in negative equity or unable to meet their repayments after the low-start offer period. Nationwide and Lloyds TSB last week increased their mortgage rates again: new two-year deals average 6.75 per cent compared with 5.5 per cent a year ago.
Remortgaging is now the banks' main business: for every four loans to homebuyers, seven mortgages go to people changing lender without moving house.
Quarterly figures for repossessions in England and Wales peaked at 51,000 in 1991 but are already above 40,000 this year. Yet the CML is confident defaults will not reach past levels. It will update its forecast in August but has so far stuck with a prediction of 45,000 repossessions this year, despite revising all its other estimates negatively.
Even so, the CML is so unsure of the housing market's future that it has abandoned forecasting prices beyond predicting a 7 per cent fall this year – which the Halifax says has already happened. "We see this as a very difficult market to call," admits Ms Anderson at the CML. "The really core thing for us is what sort of effect the Bank of England funding intervention has."
The Bank is making £50bn – possibly more – available to mortgage banks but only for refinancing existing loans, not for funding new purchases. It is action aimed at protecting the banks, not helping housebuilders, aiding first-time buyers or reviving the housing market.
Several bankers are understood to have applied for funds, and the gossip among them is that the first tranches are now being released. Nothing is being said officially, though. As Ms Anderson puts it: "The Bank is adopting a silence policy on levels of take-up."Reuse content