Property Advice

Monday 17 July 2017

Are first time buyers really priced out of The Hampstead Property Market ?


We are constantly hearing stories in the press about the severe housing shortage and lack of new build properties that is fuelling house price inflation, making home ownership further and further out of reach for the younger generation. 
As a landlord and as someone who advises landlords, I'll be the first to admit that daring to ask the question wont win me any popularity contests. 
Having said that, after avidly listening to Property Hour on LBC at 9pm and reading various articles in property publications, the topic aroused my curiosity. 



I purchased my first home some 15 years ago, it was 2 bedroom first floor flat in the North London suburb of Palmers Green. 
It was the biggest purchase I'd made at the time and i paid the princely sum of £145,000 and the bank lent me £123,250 which was based on an 85% mortgage. 
The interest on the mortgage back then was 6.8%. The rate went down quite sharply in the next few years, but 6.8% per cent was what it started at and remained so for the next 5-6 years. 
The cost of servicing the loan was about £12,000 per year. I was working as a Lettings Negotiator at an Independent Agency and earning around £30,000 per year, which was considered to be pretty respectable at the time. 
Based on the numbers, the mortgage was around 40% of my income at the time.
Today, my guess is that a Graduate aged 25 plus, with a half-decent honours degree, will earn up to £40,000 per year.  
In today's market this flat would wear a price tag of £335,000. If our smart young twenty something graduate gets a 85 per cent loan to value residential mortgage, his interest rate might be as low as 1.5 per cent. This would equate to mortgage interest payments of £4,285 (1.5 per cent of a loan of £285,700 which is 85 per cent of the £335,000 the flat costs today).
So, he will pay just a little over 10 per cent of his income as a mortgage. And this is a great deal less than the percentage that came out of my earnings back in 2002. Indeed, our graduate today would need to be earning just £20,000 for his mortgage interest payments to gobble up the same percentage of his income as my mortgage did back in 2002.

Generation Rent
The younger generation like to tell folks that people are priced out in a way they were never priced out before. Based on my example, this case challenges that assumption.
Lenders are also offering what is arguably the widest range of loans ever. They have loosened their grip on the purse strings and are agreeing loans to those who can afford it. Interest rates on loans are a comparatively small proportion to incomes. 

 Back in 2002, lending was pretty rampant as it was in the boom times, though despite this we now have Help To Buy Isas and all kinds of other schemes that assist first time buyers.   
Whilst today's graduates will have Student loans to service, they can be repaid over long periods and are adjusted according to income, so this wont put the finances out of kilter. 

Property Bug

 After I bought my first place, I got the property bug and had the ambition to further invest in assets that grew in value. 
And I found out that I could let out my smaller second bedroom for £305 per month or £3660 per annum, or 30% of what the mortgage was costing me).
The option is still available today, in fact HMRC will give you a tax free amount of £7500 per year. This is in fact something that home owners of previous generations didn't have on offer to them. 
In my opinion , the young would-be homeowner could let the pretty nice second bedroom for the full £7,500 per annum, which is over £3,000 more than he will pay on his mortgage.Compared to my own case, I was only getting 30% of the what the mortgage was costing me. 
Lets also bear in mind, this was a case where there was only a single income. Should there be 2 incomes in the equation, it makes buying in today's market even more of a steal.
So, there is my case, all points of view are welcome. 
I will take the liberty of saying that perhaps the younger people just don't like or are into the idea of saving. Its well documented that they have more money to spend than previous generations, though they also have more things to spend it on. For most, it will be two holidays per year, restaurants every weekend, latest mobile phone, new car, Sky TV package, Amazon account, the list is endless- delayed gratification is a thing of the past. 
These are the home truths, as i said , I'm not looking to win a popularity contest, feel free to be critical...
Points of View 
A friend of mine works as an Auditor for a large bank and he was challenging some of these assumptions. He pointed out that interest rates will no doubt rise from their current all time low. 

 He agreed with the impact of student loan repayments today, and pointed out that this would drag todays’ twenty something down by £3,000 per annum (based on a £40,000 salary). He said this could be a crucial restriction in practice, especially as rent are much higher today, which would make it that much harder to save for the deposit. And that deposit, he also noted, forms a higher chunk of todays’ first time buyers’ income. Having listened to that, I could appreciate the weight of his argument. The ratio of the deposit I paid in 2002 to my gross income was equal to two thirds of my yearly income. The ratio today is 1.125 times a years’ gross income, so that is true, it is a bit more of struggle to get the deposit today.
Interestingly, the point of the level of borrowing is much higher, therefore, more capital has to be repaid over the long term. So, this creates a greater challenge for today's borrower because the capital amount borrowed is a bigger chunk relative to income than it was in my day. (It is 6.375 times todays’ current income (£255K / £40K), whereas in my day it was only 4.1 times my income (£30K / £123K)). These are valid points to consider over the long term of a mortgage.
However, we are constantly hearing form the younger generation and their peers, saving for the deposit is very hard as rents are so high. But that is simply not true. If we look at 2002, the rent I received on the second bedroom was just over 12% of my income . Today's rent on the second bedroom would be 18.7% of today's income, so not much difference there in percentage terms. (£7,500 / £40,000). I rest my case.
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If you are looking for an agent with experience that can help you find the right tenant for your property, then contact me to find out how we can get the best out of your investment property. Email me on chris@ashmoreresidential.com or give me a call on 020 7435 0420. Pop in for a chat – we are based at Ashmore Residential, Suite 7, 25-27 Heath Street, London, NW3 6TR. There is plenty of parking and the kettle is always on.

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