The gap between those who can afford to buy and those who can’t is widening
(Picture: Daniel Lynch)The chasm between those young Londoners who can afford to buy and those who cannot is growing as the housing affordability crisis in the capital continues, made more critical by the rising cost of living.
The proportion of people relying on the bank of mum and dad (and grandparents) has grown during the pandemic as the average house price across the capital continued to climb, despite the economic uncertainty created by Covid-19.
New data from the mortgage technology company Twenty7Tec, exclusive to Homes & Property, has revealed that last month nearly two thirds (64.4 per cent) of all mortgages secured for home sales by first-time buyers across London involved a family gift, up from 62.5 per cent a year ago. These numbers do not include inheritance.
“This data shows that where the deposit source has been selected by advisors, a family gift is by far and away the most selected option,” said a spokesperson for Twenty7Tec.
The London picture is reflective of the national trend. According to Savills, the number of first-time buyers purchasing with family money across the UK was on the rise during the pandemic and will continue to climb.
In 2021 the percentage of first-time buyer home sales with family assistance rose to a seven-year high of 46 per cent with an average of £56,150, up from 43 per cent in 2020 and 39 per cent in 2019. This will rise again next year to 47 per cent in 2023, Savills forecasts.
“There is a bit of pandemic reaction here, as parents and grandparents think ‘what’s the point of sitting on this money’. Maybe some went back to live with their parents during the lockdowns and it has motivated the parents to help them buy for themselves,” said Savills analyst Lawrence Bowles.
For some, the pandemic has meant being able to move back home, stop paying rent and save for that deposit, if their parents have a big enough place to house them within the home counties and within reach of work, he continued.
“This is certainly not a uniform picture across the capital and as a result the gap between the haves and have nots, those who are able to get on the ladder or not following the pandemic, is getting wider,” he said.
High cost of living and homes means prices will fall
The growing number and size of parental handouts is reflective of the amount of equity the baby boomer generation holds in the UK owing to the extraordinary rise in value of their property, and the high cost of housing in the capital.
Boosted by the Chancellor’s emergency stamp duty holiday granted in July 2020, and a lack of supply, house prices continued to rise in London during the pandemic – despite the widely reported exodus to the countryside.
Property values jumped by £20,668 or 4.2 per cent last year across London (according to recent Nationwide numbers) taking the average cost of a home across the capital to £507,230.
Savills predicts that prices will grow again by 3.5 per cent this year, putting the home ownership dream out of reach for many. "First time buyers are as stretched as they possibly can be," says Bowles.
As a result of high house prices and rising living costs, Savills has downgraded its house price forecasts with the average value falling one per cent next year in London and then growing gradually 0.5 per cent in 2024, 1.5 per cent in 2025 and another one per cent in 2026. That’s a total of five per cent over the next five years for the mainstream property market in London.
"Unless we see the withdrawal or relaxation of mortgage rules there will be a cap on house price growth due to continued affordability pressures," says Bowles.
Revised London house price forecasts
2022: 3.5 per cent growth
2023: -1.0 per cent
2024: 0.5 per cent
2025: 1.0 per cent
2026: 1.0 per cent
Five-year London forecast: 5.0 per cent growth
Source: Savills
The UK housing market to cool
The overall UK property market is showing signs of slowing after huge house price growth in the regions, finally buckling under the same pressures of affordability.
Although Nationwide recently reported the 10th successive month of house price growth of 11.2 per cent over the 12 months to May, the pace of annual growth has pulled back slightly. The average house price in the UK is now £269,914 according to the lender.
"We continue to expect the housing market to slow as the year progresses. Household finances are likely to remain under pressure with inflation set to reach double digits in the coming months if global energy prices remain high," says Robert Gardner, chief economist at Nationwide.
"Measures of consumer confidence have already fallen towards record lows," he continues. "Moreover, the Bank of England is widely expected to raise interest rates further, which will exert a cooling impact on the market if it feeds through to mortgage rates."
Revised UK house price forecasts
2022: 7.5 per cent growth
2023: -1.0 per cent
2024: 1.5 per cent
2025: 1.0 per cent
2026: 2.5 per cent
Five-year UK forecast: 12.9 per cent
Source: Savills
Energy bills and global conflict hit borrowing
A fall in the number of people borrowing to buy a house is also an early indicator that the hot pandemic property market is set to cool.
Only last week, the Bank of England reported that net mortgage borrowing dropped to £4.1 billion in April, down from £6.4 billion in March. Mortgage approvals for house purchases also decreased to 66,000 in April from 69,500 in March. Both measures are now below their 12-month pre-pandemic averages up to February 2020.
"Activity among purchasers is ebbing as the cost of living squeeze shrinks the pool of buyers. Rates on certain products hace doubled in the past 12 months and there is a real sense of urgency among many borrowers who feel they must act soon or reassess what they can afford," explains Hina Bhudia of Knight Frank Finance.
Luxury London to bounce back
The luxury of core of London (otherwise known as prime central London) is expected to buck this national trend, as global instability and the return of international travel drives its overdue recovery.
"It is difficult to forecast house price growth with so much going on and so much noise – from rising interest rates, inflation to living costs," says Marcus Dixon, head of residential research at JLL. "Other factors are at play too. Any global uncertainty – such as the conflict in the Ukraine – can mean international investors turn to bricks and mortar in the world’s perceived safe havens, just as London," he explains.
There is also pent up demand from places such as China and Hong Kong, where there have been recent lockdowns and still travel restrictions are still in place, Dixon continues. "These buyers are yet to come back."
Louis Harding, who runs the London business for Strutt & Parker, agrees. "Buyers in prime central London will be less impacted by rising inflation and an increase in the cost of borrowing. Prime central London will also disproportionally benefit from the return of international travel which is yet to be fully realised."
The pound is weak against the dollar and with property prices having fallen over the course of the pandemic, it looks "good value" for the international high networth buyer, he continues.
Savills forecasts a rise in values in PCL of eight per cent this year and overall growth of 23.9 per cent over the next five years.
