The Wealth of Nations or Relations – how do we best help first time buyers?

Alex Beavis
Head of Mortgage Products - Skipton Building Society

In 1776, 'the father of economics' Adam Smith, first described the 'unobservable force' that brings balance to the supply and demand dynamic in a free market economy. It might sound like Star Wars, but Smith's 'invisible hand' theory is actually very simple.

Smith suggested that any free market left to its own devices will naturally settle on product distribution and prices beneficial to all in society. In other words, if one seller is selling milk at extortionately high prices (£2/pint), the ‘invisible hand’ of the market creates the opportunity for another seller to sell milk at a lower price (say, £1/pint), with consumers naturally switching to the lower priced product. This in turn brings milk prices across the market down until a balance is struck between supply and demand, and all achieved without government intervention.

Fast forward 243 years. How do we square Smith’s economic theories with our ‘broken’ UK housing market? Let’s consider first time buyers (FTBs). Latest data from UK Finance suggests that first time buyers are older than ever before (aged 30 in 2018 versus 26 in 1974), require larger deposits than ever before and as a result are having to save longer to accumulate the necessary funds.

Economic theory would suggest that given the general unaffordability of property, FTBs would then turn their attention to other lower priced alternatives. And in fact, they have. FTBs are renting, staying at home with mum and dad or sharing with other similarly constrained potential purchasers. Some have even given up the dream of home ownership entirely. So why haven’t we seen market forces correct house prices to a more affordable level?

To break it down simply, it’s clear that first time buyers face two distinct financial challenges. First is the ability to raise a deposit. Next, the ability to demonstrate the necessary affordability to maintain a mortgage. Solutions to these challenges are numerous.

On the deposit side we’ve seen a raft of government schemes either focusing on bolstering savings (Lifetime ISA, Help to Buy ISA), or, on the purchase side, reducing (HtB Mortgage Guarantee) or supplementing deposits (HtB Shared Equity). Closer to home, we’ve seen the ‘bank of mum and dad’ stepping into the breach with gifted deposits and so-called ‘family mortgages’ helping to boost funds for potential FTBs now facing an eight-year savings slog to reach the average deposit.

On the affordability side we’ve seen lenders attempt to stimulate the market with schemes like joint borrower/sole proprietor, low start mortgages and longer mortgage terms. Though rarer, some of the more innovative initiatives address both barriers with schemes like Right to Buy, Shared Ownership and in Scotland, LIFT, helping provide access to low deposit and low cost mortgages.

What do all these remedies have in common? They all continue to propagate the status quo. The crux of the argument here is that the issues facing first time buyers are in part to be blamed on the very fact that we haven’t allowed market forces to naturally correct the imbalance. Going further, I’d argue that in fact, recent intervention, especially governmental, has delivered not much more than ever more ingenious sticking plaster solutions to what is essentially a fundamental supply/demand imbalance. We can’t continue to treat the symptoms without addressing the root cause.

So what’s the answer? Rather than waiting for government to fix the broken housing market, I’d suggest we simply let the market fix itself. Over 150 years ago, the very first building societies were simply groups of like-minded individuals with a common purpose. These would be homeowners, acting at a grassroots level, were the ‘invisible hand’ promoting and enabling homeownership by forming savings societies to pool funds to help members purchase property.

Whilst building societies (and indeed banks) will continue to help, there are also encouraging signs of private sector innovations taking up the mantle. Private shared equity schemes, builder-funded equity schemes, discounted purchases and private Shared Ownership may all provide viable alternatives to government-backed initiatives as awareness, and more importantly, lender support for these alternatives continues to grow.

Whichever way we turn, the untreated wound remains the gulf between supply and demand for UK housing stock. Whilst going cold-turkey on Help to Buy is perhaps too drastic a measure, the phased withdrawal from 2021 to 2023 is long overdue. Like it or not, the time is soon coming to remove the sticking plaster and let the talented and innovative minds across our industry provide the solutions themselves.