When Joe Raynes decided this year to move from his one-bedroom flat in central Bristol to something larger, he had no problems selling. His home — the first he had owned — went on the market in April, and was snapped up within a week.
But buying something new presented an altogether greater challenge. Looking for places with outside space for up to £260,000, he found viewings of homes were booked within a day of being marketed. Making an offer on one, he discovered he was competing with bids from 18 other people.
In this competitive situation, price rises were rapid and dramatic. “Two years ago I wouldn’t have thought about even paying the asking price. Now they’re going for £20,000 to £30,000 over the asking price.”
To stay within his budget, he found himself having to consider homes at a lower asking price in expectation of an inevitable mark-up in the bidding. Starting at homes priced at around £190,000, he was looking at close to the £185,000 for which he sold his one-bed flat, causing him further doubts. “It seems silly to move somewhere else that costs the same as mine. Even so, I’m still finding those places difficult to get.”
Raynes’s experience underlines a significant, growing trend in the UK property market: the widening gap between the rungs of the property ladder as prices soar across the nation and the country emerges from lockdown. The desire of homeowners for more space, triggered by the pandemic, has compounded the impact of a backlog of buyers wanting to move for all the normal reasons — and increased demand for step-up homes.
The problems facing first-time buyers are well known, among them mortgage affordability and the spiralling deposit requirement. But it is now those already in the market and wanting to move to a bigger or better-located home — often those seeking more room as they start a family — who are in trouble. Like the first-time buyers, they are competing in a market dominated by affluent buyers with plentiful housing equity accumulated over the past decade.
Even those with deep pockets, whether by virtue of high incomes or housing wealth, are having to recalibrate their expectations when it comes to buying a more suitable home.
Raynes is fortunate in having a high level of equity, which allows him to qualify for the 60-70 per cent loan-to-value mortgages which attract lower interest rates. But having to bid ever higher prices on potential properties seems like an obvious risk in a feverish market. And he fears that waiting for the feeding frenzy to die down with a spell in the rented sector may also be unwise — though this is exactly the position he now finds himself in.
“It feels like you could lose a lot of money either way. You could overpay. Or you could stay out of the market for a few years and it keeps inflating and your money’s worth a lot less.”
Previous generations took for granted their ability to trade up in the housing market as their circumstances improved. As those assumptions look increasingly shaky, FT Money looks at the new barriers to “stepping up” in a post-pandemic UK housing market.
Haves and have-nots
Much of the problem faced by buyers like Raynes can be laid at the door of the inflation-busting house price growth that has dominated the housing market since 2007 and over lengthy periods in the previous two decades. As a result, the average homebuyer today needs to be much more affluent than their counterparts were in the 1980s and 1990s, a trend that accelerated over the pandemic.
Homebuyers have crept up the income scale over the past four decades, says Lucian Cook, residential research director at estate agent Savills. He combined data from UK Finance, the banking industry body, and the Office for National Statistics, to illustrate this long-term shift.
Forty years ago, the average homebuyer had household earnings that were, statistically speaking, at the 38th percentile of non-retired earnings. This meant 62 per cent of households earned more than they did. By 2000, the average homebuyer had moved up to the 50 per cent mark. By 2020, however, they were at 66 per cent on the household earnings scale, underscoring a significant shift in affordability and the difficulties faced by many aspiring buyers to access mortgage finance in the face of steepening house price to income ratios.
“This shift reflects a progressive increase in the relative affluence of households who are buying. This has accelerated since 2017 and noticeably during the pandemic,” Cook says. “What this shows is that the shape of the market often changes, and the market will adapt to the higher house price environment, but the ‘give’ is in who is able to buy in that environment.”
Last year also provided another disconcerting statistic: the average income of mortgaged home-movers for the first time rose into the top 25 per cent of earners.
The driver was a pandemic that brought higher household savings for some, the spur of a stamp duty holiday and the “race for space”. For those with deep wellsprings of housing equity accumulated over years, it was a chance to move to a more comfortable home often in a leafier setting, easing the privations of any future lockdowns, or to buy a second home for similar reasons.
But the type of home they sought out was often the kind targeted by the traditional “next-stepper”, looking to expand into a family-sized home with outside space and another bedroom or two.
The price gap nationally between a two-bed flat — a popular first home — and a three-bed house has nearly doubled in the past decade, says Richard Donnell, executive director of research at property website Zoopla. To upsize to the roomier property, a buyer would be now looking at an average 49 per cent higher price, or a gap of £78,000, compared with a gap of £39,000 in 2010.
Lockdown living pushed this trend to a new high, he says. “The rungs of the housing ladder are widening as a result of the pandemic and buyers prioritising more space. The greatest impact is on those looking to step up from a two-bed flat to a three-bed home, the most sought after of all property types.”
The gap is greatest in more affordable markets — outside the south of England — where there is still room for prices to grow in spite of tightening mortgage regulation and affordability testing. But the effect is seen across the UK.
Pressure on the three-bed house market in these affordable regions has also come from a less obvious source: first-time buyers. Seeing the current difficulties of the old model — buying small then trading up quickly with debt and higher house price growth — they are jumping the lowest rungs of the ladder where they can.
“They are buying later and bigger,” says Donnell. “Our data show first-time buyers want a three-bed house across all regions except London and Scotland, where flats are the dominant property type.” London’s houses will be out of the question for most first-time buyers simply by virtue of price.
But just like other types of purchaser, first-time buyers are also coming from more affluent groups. For the first time, average income for first time buyers in 2020 was above the median household income, says Cook of Savills. “That might have been because they are the ones who have access to the Bank of Mum and Dad. That’s clearly been more important when their average deposit has remained a pretty significant outgoing.”
Tantalised by low rates
Rising prices have an obvious impact on growing families who may be unable to leave cramped accommodation when children arrive, as well as first-time buyers without the good fortune to be able to call on relatives. But it has also trimmed the expectations of those in higher price brackets.
Simon Gammon, managing partner of mortgage broker Knight Frank Finance, says buyers armed with a large deposit have more often had to settle for buying outside their preferred location, or to compromise on their ideal property as prices rises have accelerated. But the mortgage market has also compounded this effect.
Gammon describes the “common scenario” of a customer who has a modest £100,000 deposit to put down on a new home. In many postcodes that is no longer enough to get them within range of a 60-70 per cent loan-to-value mortgage deal, he says, pushing them into the more expensive 75-80 per cent LTV bracket. “Your deposit isn’t going as far, which forces a higher LTV, which then forces you into a position of having to compromise.”
Still, older generations contemplating the ultra-low mortgage interest rates currently on offer may wonder what all the fuss is about. The latest example came last month, when Nationwide launched a 0.99 per cent five-year fixed rate deal — the first such mortgage with a sub-1 per cent rate. Compared with the 1980s and 1990s, when Bank of England base rates several times ventured into double figures, today’s borrowers have never had it so good on rates.
The catch, though, is that lenders have become far more selective over their mortgage customers, responding to the pandemic by adding extra hurdles to affordability tests that were introduced after the financial crisis of 2008. Economic uncertainty has brought a much more forensic approach among banks and building societies to the question of who may access their deals — even as they vie to offer record low rates.
“It’s rubbing salt in the wound,” says Gammon. “Lenders aren’t doing as much lending as they want because they’re scrutinising applicants more heavily, so they’re trying to win business by dropping their prices. You can’t get the mortgage you want, but by the way mortgages are as cheap as they’ve ever been.”
Helen Taylor, who runs her own business in the beauty and aesthetics sector, has been looking to step up to a larger, new-build house in Rugby with her partner, but has come up against the barriers erected by lenders towards the self-employed.
In the past six months, her business has staged a rapid recovery from the pandemic, with turnover doubling compared with the same period last year. The closure of shops and salons forced her to shutter her business for six months last year, but she took no mortgage holiday, and had ample savings to tide her over the lockdown restrictions. With a chunky £180,000 deposit on a £400,000 house, she sought a 55 per cent loan-to-value mortgage — at the lower end of the risk spectrum for lenders.
Even so, she says brokers came back with inquiries from underwriters seeking assurances about the possibility of arrears. “For goodness sake, we’ve just been through Covid and we didn’t go into arrears,” she says. “If we didn’t get into problems in the past 12 months, when would we?”
The day she spoke to the FT, she had finally received a mortgage offer, from Family Building Society, for a five-year fixed rate deal at 3.09 per cent. But it stings when she sees headlines trumpeting 0.99 per cent five-year rates. “It hits you where it hurts,” she says.
Lenders have taken not only to asking new questions on mortgage applications such as “Have you ever been furloughed?” says Gammon, but their stringent approach to entrepreneurs has also brought new paperwork requirements. “In the past lenders would have asked for the last three years of audited accounts for a self-employed person. Now they’re asking for the most recent management accounts. They want to see how it’s trading.”
Competitive outlook
Will the rungs of the ladder continue to widen? While Savills predicts UK house price growth over the next five years, Cook believes a point of balance will be reached under the countervailing forces of the mortgage affordability rules and — at some point in the future — rises in interest rates.
“There has to be a point at which the market can only function when you’ve got a certain proportion of households which are able to buy. That will be one of the reasons why, when interest rates do creep up, we will see a bit of a cap on house price growth.”
In a ferociously competitive market, Gammon is more concerned about the effect of a rise in interest rates on those borrowers who have stretched themselves to the limit today to get the house they want — and access the low rates currently on offer. Taking the example of the borrower who succeeds in getting the 0.99 per cent five-year fix, he says it is “very conceivable” that rates will have risen to 1.5 or 2 per cent when that fixed rate period ends, which means their monthly payments double or treble.
“Some people are stretching to the max on their borrowing capacity on a record low interest rate,” he says. “When they come to the end of that product there could be one hell of a shock.”
How to be ‘mortgage ready’
In a highly competitive market, it pays to be well-prepared when engaging with potential lenders. The most important way of saving time is by having a clear idea of your figures, says David Hollingworth, associate director at L&C Mortgages, a broker. This helps not only with the paperwork, but will give you a sense of whether you’re stretching your finances and so whether you need to take more care when selecting a lender.
Work out how much you have as a deposit, not forgetting potential ancillary costs such as stamp duty, legal fees and survey costs. “That will help you understand what size of mortgage you’ll need for a property value and what kind of rates might be on offer,” says Hollingworth.
A lender will want to know details of your income and outgoings, including existing debts, to decide whether the loan is affordable. Don’t assume you can throw bonuses, commission payments or overtime into the income pot. In the pandemic, lenders cut back on the proportion of these they would consider, if at all. Many have once again raised the amount of bonus income they will consider but you will need to check.
Self-employed people should brace for more red tape in the application process, as lenders seek reassurance about whether income from the business is reliable, including seeing current business statements. Those who took up a SEISS grant in the pandemic may find some lenders turn them down even if the business has recovered. “Self-employed applications are tricky,” says Hollingworth.
If you are refused, don’t expect to receive a detailed explanation. If a lender finds something on your credit file, they will not explain it to you or put it down to a single cause. Lenders may also operate a credit-scoring system of their own, using a host of factors.
If you don’t meet their requirements, consider a smaller lender or building society, which sometimes make a virtue of not credit scoring. “They might be more prepared to take an individual approach — what might be termed a ‘common sense’ lending decision,” says Hollingworth.
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