One foot on the ladder...

Is now a good time to make the leap from tenant to buyer? Ginetta Vedrickas
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The future of the housing market is a pressing subject for everyone, not least for first-time buyers. Prices appear to have stabilised, Hometrack's October survey shows, with 18 of London's 33 boroughs reporting zero or negative house-price inflation. This, coupled with the lowest interest rates seen for 50 years, may tempt some first-timers to jump aboard the property ladder. But some experts say that, what- ever happens in the coming months, the outlook for first-timers is bleak.

A report by the Joseph Rowntree Foundation calls cheap home loans "a boon and a potential pitfall" and warns of dangers if the economy starts to recover, or tips into recession. In a joint project with the Chartered Institute of Housing and the Council of Mortgage Lenders, the report says the housing market will peak this winter, and the inevitable slowdown in the economy will lead to falling house prices which are more sustainable but which could leave many people overstretched.

Author Steve Wilcox believes the low cost of borrowing is partially responsible for the "no-win" situation. He believes that if the economy slumps first-time buyers will suffer most from falling house prices and could even find themselves facing negative equity. And if the economy recovers, they will also suffer from rising interest rates. He thinks the present situation has potentially more severe consequences than those of the early Nineties. "Today's mortgage borrowers have a far less effective safety net," he says.

Changes in government policy mean anyone who has taken out a mortgage since 1995 and falls behind with repay-ments is potentially excluded from social security help for the first nine months of becoming entitled to job seekers' allowance. "Buyers tend not to ignore the fact that they could become unemployed, so it comes as a rude shock," Mr Wilcox warns. "And most have not taken out mortgage protection plans."

He believes this housing boom is not simply a repeat of the 1980s, principally because of affordability. In 2000, house prices rose across the UK by 14 per cent, and 18 per cent in London, but these rises have been offset by lower interest rates. In the late Eighties, house prices rose but interest rates were quickly hiked, at one point to 15 per cent, to tackle inflation, which led to a crisis in affordability.

Where buyers are overstretched, even a small increase could result in a similar crisis. "It need only go up to 7 per cent, about a 25 per cent rise, to have the same impact," Mr Wilcox says.

Overstretched buyers are partly protected. Lenders now regularly request deposits of 20 per cent of purchase prices which, ultimately, should prevent the boom-and-bust scenario of the late Eighties when 100 per cent mortgages were commonplace.

John Emery, a social worker, says: "Looking back. I was lucky. My partner and I had already bought a property in 1986 which we'd sold, making a profit of £40,000, and that cushioned us. Just before double tax-relief was abolished we doubled our mortgage, from £30,000 to £60,000, to buy our next house and rates went through the roof. I'd just had a promotion, so we could just about afford our repayments, but it was hard – holidays were out of the question."

Mr Emery survived but found the steep mortgage rates hard to stomach, particularly when the value of his three-bedroomed home quickly fell from £98,000 to £78,000. "Luckily, at the time we didn't need to move, but I remember friends of ours giving back the keys to their flat and moving north when they couldn't sell their property and owed more than it was worth."

Negative equity was then problematic, with repossession figures peaking at 75,540 in 1991. By 2000 numbers had fallen to 22,610, but Mr Wilcox warns that if values fall we may again see repossessions increasing. "If values hold up, people always have the option to sell or rent for a while, but if they drop, that route is blocked and you end up with more forced repossessions."

Colin Brown, an agent for Bushell, does not foresee imminent problems, nor does he believe interest rates will rise. "[But if they do], all the more reason why [first-time buyers] should lock themselves into a 10-year fixed-rate mortgage." He says there's never been a better time to buy: "It comes down to cash flow. What's most important for young buyers is how much they've got left to spend after paying their rent or mortgage. In Dulwich, a rented flat would cost you £800, but an interest-only mortgage on that flat would be £400."

He does not accept that the Rowntree report's inherent warnings apply to first-time buyers registering in his area. "London is such a unique market and so squeezed for property, you only have to look at the number of flats selling off-plan to see that [prices are not going] down. Demand is holding up."

One first-time buyer, Neil Daugherty, a PR consultant, shares this optimism. He recently bought a one- bedroom flat in south London. He paid £116,000 for it, with a 100 per cent mortgage based on four times his income."I'm not especially worried. I don't think you'll ever have trouble selling a one-bedroomed flat in London."

Mr Daugherty will be paying slightly more than he was in rent, which he believes was "dead money". He recalls negative equity from the Eighties. "I can't see it becoming an issue. If anything, I think rates will come down. It's a really good time to borrow."