Many first-time buyers will struggle to get on the property ladder even if house prices fall significantly

House prices are projected to fall in the wake of the coronavirus crisis – but, for many young people looking to buy their first home, this trend won’t make things easier. Instead, falling incomes and the risk of more restrictive lending look set to make buying a home for the first time every bit as difficult as before the crisis, according to new analysis published today (Thursday) by the Resolution Foundation.

Taking the Office for Budget Responsibility’s (OBR) house price scenarios as its starting point, the Foundation’s latest quarterly Housing Outlook explores what the different trajectories could mean for those looking to purchase their first home.

In the report, the Foundation says that plummeting incomes and rising unemployment, combined with low interest rates, mean that the most pessimistic scenario – a sharp 22 per cent drop in house prices by Q3 2021, followed by a long and slow recovery – is a realistic one. However, house price falls are predicted in even the most optimistic OBR projection.  A fall in the value of property typically spells bad news for the economy, while being helpful to first-time buyers, but the Foundation argues that, in the post-pandemic world of the early 2020s, first-time buyers will lose out on any potential benefits of cheaper housing.

The Foundation’s analysis shows that, because house price falls triggered by the coronavirus recession would come hand-in-hand with corresponding falls in income, the impact on the time the average first-time buyer family needs to save for a deposit would be negligible. Back in the 1990s, a typical young couple putting away 5 per cent of their income each year could save enough for a deposit in just 4 years. By 2019, that figure had risen to 21 years. The Foundation finds that even the OBR’s most pessimistic scenario would shave off little more than a year from this, and that even that small gain would not persist.

Although some households have managed to save more during lockdown, the Foundation finds that, coming into this crisis, just 13 per cent of private renters aged 24-35 years had savings of £10,000, and that a quarter of private renters have been forced to dig into their savings since the pandemic began. Today’s Outlook also warns that, if banks and mortgage lenders repeat their response to the financial crisis by introducing tighter credit conditions, then these could have a serious impact on aspirant buyers. The Foundation estimates that if the average first-time buyer loan-to-value ratio fell to 80 per cent (the level observed in the wake of financial crisis), by 2024 the typical number of years required to save for a deposit would rise to 27 even if house prices fell by 22 per cent.

Finally, the Foundation notes that the Government’s recent decision to cut Stamp Duty also takes away the slim advantage that aspirant homeowners had in the market. This is because the typical first-time buyer (outside of London) was already paying no Stamp Duty. Combined with the hit to incomes, and the potential for tighter lending standards, this crisis has ultimately placed more barriers to homeownership than before in front of young people – regardless of expected falls in house prices.

Lindsay Judge, Principal Research and Policy Analyst at the Resolution Foundation, said:

“The coronavirus crisis has had a big impact on the education, career prospects and incomes of young people – and unfortunately there’s no silver lining for this group when it comes to house prices.

“Although prices are projected to fall – perhaps dramatically – in the wake of the pandemic-induced recession, this drop won’t make things any easier for typical young first-time buyers looking to purchase their first home. Instead, falling incomes and credit restrictions will likely make home ownership every bit as difficult as before for many young people.

“Only those who already had high levels of savings before the pandemic started, or those who are able to borrow from their family, will truly benefit from the house price fall. This means the current crisis looks set to deepen pre-existing inequalities and the growing divide between those who are able to look forward to home ownership, and those for whom this dream is increasingly out of reach.

“Going forwards, policymakers must ensure that young peoples’ incomes are protected in the wake of the coronavirus crisis, and that their competitive advantage as first-time buyers is maintained when the stamp duty holiday comes to an end.”