Good news for first-time buyers?

Tumbling house prices are good news for people yet to place a foot on the property ladder, and there are signs that mortgage lending may be loosening up. But is it really time for first-time buyers to start celebrating?

Since the start of the dreaded credit crunch, the tables have turned in the property market.

After years of incredible rises, house prices have spent more than 12 months tumbling – and the latest statistics from the Halifax House Price Index show values have declined by 17.7% over the past year.

While those who bought property at the peak of the market are probably concerned about the impact of decreasing house prices on their finances, Halifax’s First-Time Buyer Affordability Review suggests declining property values have led to significant improvements in affordability for first-time buyers.

In addition, some mortgage lenders seem to be easing the availability of mortgages for home buyers with smaller deposits.

So just how good is this ‘good news’ for first-time buyers?

The good news: plummeting prices
According to the First-Time Buyer Affordability Review, the proportion of UK local authorities where housing is affordable for first-time buyers has more than trebled since 2007*.

In the first quarter of 2009 the average price paid for a first property was affordable for someone on average earnings in 21% of local authorities, compared to just 6% in 2007.

In addition, the house price to earnings ratio – a key measure of affordability – has fallen to its lowest level in over six years, Halifax’s report states. From its peak of 5.84 in July 2007 (when the average home cost 5.84 times the average salary!), it fell to 4.34 in March 2009.

What’s more, many experts predict we have not yet seen the bottom of the property market – despite claims that ‘green shoots’ can be seen in certain areas. Halifax’s latest House Price Index states that although house prices fell slightly less in April than they had the previous month, further house price declines are still “likely”.

Of course, this is bad news for homeowners in negative equity and those who have purchased properties as an investment. However, it should mean more first-time buyers are priced ‘back into’ the market after years of feeling shut out.

More good news: increasing mortgage availability
There has also been good news in recent weeks for mortgage borrowers with smaller deposits.

When the credit crunch first hit, the availability of mortgage finance constricted sharply, leading many lenders to reserve their best mortgages rates for customers with deposits of 40% or more.

However, Woolwich last week reduced many of its mortgage rates by an average of 0.35 percentage points. At the same time, it broadened the availability of its two year fixed rate mortgage. This deal, at 3.69%, is now accessible to borrowers with a 30% deposit, where previously a 40% deposit was required to obtain this rate.

Woolwich also cut the rate on its two year fixed rate mortgage for borrowers with a 20% deposit by a significant 0.70 percentage points, reducing it to 4.99%.

This move follows HSBC’s return to the 90% mortgage market at the start of April, which saw the bank allocate £1bn worth of funding for home loans at higher loan to value ratios (LTVs).

Elsewhere, Yorkshire and Clydesdale Banks still offer mortgages of up to 95% and recently decided to waive remortgaging fees for new customers on a range of fixed rate, offset and current account mortgage deals. Many of the mortgages covered by this limited promotion are available at LTVs of up to 80%, and borrowers who take them out will achieve a hefty saving of £999.

The bad news: big deposits still rule
Unfortunately, while some mortgage lenders seem to be loosening their criteria and demanding smaller deposits, the bigger picture is still bleak for first-time buyers.

According to recent data from Moneyfacts, the number of mortgage deals requiring a minimum 40% deposit has increased by 61% in the past six months. Conversely, the number of mortgages available to borrowers with a 10% deposit has decreased by two thirds.

While borrowers with a 40% deposit or equity stake in their property currently have 297 mortgage products to choose from (up from 184 six months ago), those in need of a 90% mortgage have access to just 71 deals.

Furthermore, the cost of mortgages at higher LTVs has decreased at a slower rate than the cost of mortgages for borrowers with large deposits. While home loans for borrowers with 40% deposits are now, on average, 1.63% cheaper than they were in November 2008, the cost of a 90% mortgage has only dropped by an average of 0.74%.

Overall, then, mortgages for those with a deposit of less than 25% are still difficult to get – and expensive in comparison with the deals on offer for borrowers with bigger sums to put down. The very best mortgage rates are still available to customers with the largest deposits, or with significant equity in their existing homes.

Sadly, I fear this situation may persist for some time to come. With the recession biting, unemployment on the up and house prices still in decline, banks and building societies are likely maintain their preference for ‘low-risk’ mortgage lending.

This means many first-time buyers will have to continue saving hard to realise their home-owning dreams.

That said, there are tentative signs of a thaw in the mortgage market, and affordability for first-time buyers has certainly improved since the start of the credit crunch. I hope lending continues to loosen over the coming year, and that more people manage to get a first foot on the property ladder. In my view, after years of being frozen out from homeownership, first-time buyers deserve a break.

* Halifax uses its own house price data and statistics from the Office for National Statistics. It defines housing as affordable if the average house price for a first-time buyer in the local authority is lower than someone paid an average wage could afford to pay.

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