The number of people buying properties before they have been built has slumped to its lowest level in more than a decade amid higher mortgage rates and a lack of government help for first-time buyers.
Higher interest rates have driven first-time buyers out of the new-build market, experts said, with people now more likely to buy second-hand homes which are “smaller and more affordable”.
The decline comes a year after the Government called time on its flagship Help To Buy scheme and almost a decade on from a new stamp duty surcharge for landlords. Research by estate agency Hamptons shows that only 32% of new homes sold in England and Wales were bought before completion – compared to almost half eight years ago.
Purchasing off-plan usually involves buyers visiting a show home or sales suite and reserving a plot based on marketing materials and floor plans. Homemovers have also been put off, with only 22% of detached homes and 31% of semi-detached homes sold before they were built in 2023.
The share of new homes sold off-plan peaked at 47% in 2016, buoyed by investors rushing to beat the 3% stamp duty second home surcharge.
Since then, landlords have made up a progressively smaller share of purchasers, and the share of new homes sold off-plan has fallen in all but one year (2021) since. Interest from British and overseas buy-to-let investors continues to wane amid uncertainty over rental reforms and recent tax relief cuts.
According to Hamptons, for the first time since the pandemic, flats are now more likely to be sold off-plan than terraced houses.
Rico Wojtulewicz, spokesman for trade body the National Federation of Housebuilders, said "there has absolutely been a reduction in off-plan transactions. The sales are down and that is a real problem for the big developers. The buying process is so slow. Large sites really need those quickfire off-plan sales to be able to move onto the next phase of the development, so it hurts them.”
David Fell, of estate agency Hamptons, said "higher mortgage rates have dampened sales. Higher mortgage rates have introduced a new barrier in the form of unaffordable repayments and have pushed buyers towards smaller, more affordable homes that are often second-hand. Housebuilders have responded to the drop in off-plan interest by slowing their build rates. Major housebuilder Persimmon, for example, reduced its output by 33% last year. Off-plan sales are the foundation of most housebuilders’ businesses – selling fewer homes before they’re built is bad news for their bottom line. In what’s a cash-intensive business, housebuilders typically borrow to build homes, paying it back when they’re sold. But with more homes only sold after they’re finished, it means developers are borrowing money for longer and at higher interest rates. With off-plan sales harder to come by, housebuilders have responded by slowing build rates to preserve capital and ensure they’re not left with large numbers of unsold finished homes.”
The East of England is the region with the lowest off-plan demand, with only 25% of new-builds bought before completion.
At the other end of the scale, London has recemented itself as the country’s off-plan capital, with 47% of homes sold before completion. But the figure is still the lowest it has been since 2012. A key factor fuelling new-build purchases in recent years was the Help to Buy equity loan scheme, which helped 350,000 people onto the housing ladder.
It allowed first-time buyers to purchase a new-build home with a 5% deposit and a 20% Government-backed equity loan, or 40% for those buying in London, but the scheme closed to new applicants in October 2022.
Fifteen-year mortgage rates also played a major role in dampening new-build interest, with buyers reluctant to take on a loan. The average two-year fix peaked at 6.85% last August, but now stands at 5.91% according to Moneyfacts.
New-builds also typically command higher prices. The average new build premium last year was 13%, according to PropertyData.
In February, the Competition and Markets Authority (CMA) launched a review into the house building sector over concerns firms had shared commercially sensitive information. The list of criticisms directed towards developers was wide-ranging – the CMA attacked shoddily built properties, excessive fees and inescapable management schemes.
The CMA stressed that a more structural overhaul of the sector is needed – which is something the regulator cannot achieve alone. The bottom line, the CMA said, is that too few homes are being built – particularly in places where they are needed most.
But Mr Fell said “the Government is unlikely to get close to hitting its house-building targets until interest rates drop back considerably and demand picks up.”
Last year, Britain built 234,000 new homes, a figure well below the Government’s 300,000 per year target. Outgoing housing secretary Michael Gove watered down those housing targets last year by making the figure advisory rather than compulsory.
How 40-year mortgages put first-time buyers' futures at risk
The rise of 40-year mortgages is putting first-time buyers' retirements at risk - and could cost some £100,000 more in interest. Ultra-long mortgages will 'come home to roost' as households are left with less money towards retirement, said banking trade body UK Finance.
Borrowers are taking out more home loans lasting up to four decades, as they struggle to get a foot on the property ladder amid high house prices and increased mortgage rates. The long-life mortgages cost far more, with £200,000 borrowed over 40 years instead of 25 racking up £112,000 in extra interest.
One in five mortgages for first-time buyers is for a term longer than 35 years – twice the proportion seen just two years ago.
Long-life mortgages: UK Finance's report shows how as interest rates climbed, longer mortgage terms dramatically shot up
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Borrowers are taking out longer loans in order to squeeze monthly payments down and fit into affordability-based lending criteria, but they can create longer term financial risks and costs. UK Finance warned in a report "the longer a customer needs to make mortgage payments, the less free income they may have over this period for other important considerations, not least contributions into their pensions. This trend of longer-term borrowing has the potential for wider societal implications, albeit that these may not come home to roost until some years down the track."
UK Finance figures show the average first-time buyer now borrows £200,000 at 75% loan-to-value, with a 31-year term.
This is Money's long-life mortgage calculator highlights how while extending a mortgage term cuts monthly payments now, it costs far more over the lifetime of the loan.
For example, the typical first-time buyer £200,000 mortgage, with an average rate of 5%, over 25 years would cost £151,000 in interest but over 40 years it would see £263,000 in interest charges rack up. Before the financial crisis, 25 years was a standard mortgage term, but that began to creep up and the average first-time buyer term is now 31 years.
Extending this to 40 years, sees interest charges shoot up.
Borrowing £200,000 over 31 years with an average 5% rate would incur £194,000 in interest. But borrowing over 40 years would see £263,000 of interest charged - costing first-time buyers £69,000 extra over the life of their mortgage.
UK Finance's report said "the small but increasing minority of both home mover and remortgage customers borrowing at these longer terms points to more entrenched affordability issues. Rather than just stretching terms as a means of improving affordability in order to enter the housing market, more customers are needing to do this in subsequent mortgage transactions, further on in their homeownership journeys and their working lives. This longer term borrowing all takes place within FCA responsible lending rules, including those cases where the term stretches into retirement."
Long-life mortgages began to dramatically pick up as interest rates rose in 2022 to tackle soaring inflation and shot up further in the wake of Liz Truss's mini-Budget in September of that year when borrowing rates soared.
At the start of that year, loans stretching more than 35 years represented just 8 per cent of first-time buyer mortgages. But that rose to 17% by the end of 2022 before peaking at 23% in December last year. Although mortgage rates have eased from their highest levels, the proportion of extra-long deals was only down to 21% in March.
UK Finance said the proportion of loans with terms up to 40 years 'remains far higher than we have seen in the past' for 'all types of borrower but most significantly among first-time buyers'.
David Hollingworth, an associate director at broker L&C Mortgages, said "taking a mortgage over a longer term may help with the initial monthly payments but the cost will mount up substantially over time. Borrowers need to be disciplined in reviewing the term, or overpaying wherever possible, to reduce that burden. If not, it will continue to have a bigger impact on disposable income for longer, which could have knock-on consequences for saving and for resources in retirement."
Former pensions minister Baroness Altmann said "if the only option for people is to get a longer-term mortgage then for many that is better than paying rent which will also prevent them saving. The issue for me is to ensure lenders don't profiteer on these long-term loans as borrowers do end up paying back more the longer the term."