Home affordability is less favourable for second steppers
UK home owners looking to take their second step on the property ladder are facing the toughest market conditions for over a quarter of a century, according to the latest Lloyds TSB Homemovers Review.
Home affordability for second steppers is less favourable than for first time buyers as their current equity position would account for just 5% of the price of a typical second stepper home. Compared with 44% in 2005, it points out.
Home movers now account for the smallest share of home buyers since 2001 and the average home mover deposit in 2012 was £61,536, a rise of 70% from the average of £36,280 in 2002.
Housing affordability for second steppers, calculated as the average price of a typical second stepper home1 less their current equity position as a ratio of average earnings, stood at almost five (4.7) times gross annual average earnings in June 2012, the second highest ratio since records began 25 years ago.
Lloyds TSB says that this affordability measure has risen significantly over the past decade from 3.2 in 2002 and is well above the long run average of 3.3. However, it does represent an improvement on June 2011 when the ratio stood at 5.2, reflecting the losses faced by those who bought for the first time at the very top of the market in 2007.
Home affordability for second steppers is also less favourable than for first time buyers at 4.7 times gross annual average earnings compared with 4.1. This is in contrast to the peak of the housing market in 2007 when second stepper home affordability at 4.3 was significantly more favourable than for first time buyers at 5.5.
The current affordability position for second steppers is similar to much of the 1990s when falling house prices in the first half of the decade and weak house price growth thereafter, adversely affected levels of equity. This made it typically harder for home buyers to move up to the second rung of the housing ladder than it was for first-time buyers to enter the market during most of the decade.
‘It is clearly very concerning that the challenges facing those attempting to take their second step on the housing ladder are the toughest for more than a generation. This follows the significant decline in house prices over recent years and the subsequent erosion of equity among those who bought for the first time at close to the peak of the market,’ said Suren Thiru, housing economist at Lloyds TSB.
‘The current problems facing second steppers have serious implications for the wider housing market, creating a bottleneck that significantly limits the number of homes available to first time buyers as well as stopping many home owners who need to move, possibly for family reasons, from doing so,’ added Thiru.
The report says that the decline in home affordability for second steppers has been caused by the recent fall in house prices. The average price paid by a first time buyer has dropped by 16% since 2008.
A Lloyds TSB study has found that first time buyers typically plan to stay in their first property for four years. On this basis, many potential second steppers in 2012 would have bought their first home in 2008, close to the peak of the housing market. As a consequence of the fall in house prices over the past four years, potential second steppers in 2012 are estimated to be in a positive equity position of just £9,0085 on average.
Second steppers’ current equity position of £9,008 would account for just 5.4% of the value of the typical second stepper property in 2012. This compares to a peak in 2005 when second steppers where able to fund almost half of their next home from the equity built up in their first property.
Historically, home owners have typically been able to finance almost a quarter of their move onto the second rung of the housing ladder from the equity built up in their starter home. This is nearly five times second steppers’ average equity position in 2012.