The property market is being saved from a house price crash by an unlikely source – renters buying their first home.
Fed-up with competing for rental properties at extortionate prices, thousands are stretching their finances to get on the housing ladder despite sky-high mortgage rates. House prices have slumped 4.6% from peak in August to an average of £257,122, according to lender Nationwide. However, experts say this fall would be much bigger were it not for demand from first-time buyers, which now represent the highest proportion of buyers on record.
Some 27.1% of property sales have gone to first-time buyers this year, up from 26.7% last year and 23.8% in 2021, according to Hamptons. This is the biggest proportion since the estate agent’s records began in 2009.
Soaring rents
Persistent demand from first-time buyers has confounded expectations. Neal Hudson, of analyst BuiltPlace said, “normally in a period of stress you would expect first-time buyers to be hardest hit, it’s surprising that they’re the most resilient group. But a terrible rental market, replete with rising prices and a shortage of available properties, is making buying a more attractive option for many."
Rents on newly-let properties have surged by 8% in the past year, according to Hamptons. The average rent is £1,236 a month. Tenants are under the most pressure in London, where rents have ballooned by 16% – more than anywhere else in Great Britain. In inner London, rents have surged 19%.
It costs £2,178 a month to rent the average property in London, and £3,046 in inner London. Other pinch points are in the North, Midlands and South East, where rents have jumped 10%, 9% and 9% respectively. In Scotland, rents are capped at 3% for existing tenants but those who need to move to a new home face increases of 11%.
Why rents are rising
The chaos in the rental market can be explained by multiple factors. The primary reason is that landlords are facing higher mortgage rates when they come to remortgage, and are passing on the higher costs to tenants – or selling up and leaving the market entirely.
Landlords are making up 16% of sales this year, but only 12% of purchases, according to Hamptons. Tenant demand is also outpacing supply, which means renters have little choice but to accept higher prices. Bidding wars are commonplace as some renters offer more than the asking price on homes to secure new tenancies.
Others are offering six to 12 months of rent in advance to shore up their negotiating position. Hudson says, “stock levels are well down compared to normal levels. There's a lot of reasons for that, but what it does mean is that there are far more people competing for far fewer rental properties and that's driving up rents. Some homes are also being switched to holiday lets or landlords are leaving the private rental sector to provide more lucrative temporary accommodation for councils."
Meanwhile, the Government has failed to meet its target of building 300,000 homes a year, which is adding further constraints to supply.
Cheaper than buy-to-rent
These factors are combining to create a perfect storm that is pushing renters to buy properties, despite the rocketing costs of home ownership. Many have been forced to ask their parents for financial help.
The average first-time buyer paid a deposit of £63,450 in January, which was worth 24% of their purchase price of £269,274, according to market data from CACI analysed by lender First Direct. The average two-year fixed mortgage rate is 5.32%, up from 2.58% a year ago, according to Moneyfacts, an analyst.
The average first-time buyer loan would result in monthly repayments of £1,242 a month on a 25-year term, which is more than the average rent. However, many first-time buyers are extending the length of their mortgages to reduce their repayments to their current rent or lower.
Historically a 25-year term was the norm, but more than half (55%) of first-time buyers took out mortgages longer than 30 years in December, according to trade body UK Finance. This was the highest level since records began in April 2005.
On a 35-year term, the monthly repayments on the same loan would be £1,081 a month, according to L&C Mortgages. The maximum term offered by lenders is 40 years, which would result in repayments of £1,036 a month. However, the so-called Bank of Mum and Dad may not be big enough to continue propping up the housing market indefinitely.
Hudson says,“older generations are sitting on a lot of wealth, but a lot of it's tied up in pensions and property. It's not liquid wealth that they can easily help their children or grandchildren with, so it's quite difficult to know exactly how long that support will last.”
Many renters want government help for first time buyers
New research from The Mortgage Lender reveals that 44% of renters would like more cost-of-living support from the government. Specifically some 30% of those tenants polled by the lender would like intervention to reduce interest rates while 27% would like to see improved quality controls for conditions within the rental market.
In addition, 26% of renters would like to see improved first time buyer support from government and 15% would also like to see more housebuilding to increase property stock. Turning to sustainability and the UK’s Net Zero goals, 23% of renters are keen to see greater government support in making energy efficiency improvements.
TML says this wish list of what renters want from government corresponds with their overall sentiment when it comes to affordability. Indeed 45% of renters said that the cost of affording regular household bills and other property expenses was their main concern, while 34% said that affording their monthly rental payments was their biggest worry.
TML chief commercial officer Steve Griffith says, “with many renters facing a series of challenges in their journey to homeownership, the rental sector has never been more important. But high demand continues to outstrip supply, ultimately pushing up rental prices, and the cost of living crisis plays a significant part in affecting consumers’ overall affordability. “It is evident those who want to step foot onto the property ladder are seeking more support from the government in order to do so, whether that’s helping with shorter term finances or support for the wider property market to help increase access for new entrants. But with much uncertainty still around in terms of inflation and interest rates, there may well need to be some further intervention to help people achieve their property goals.”