Azara Blog: First-time house buyers

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Date published: 2005/01/22

The BBC says:

First-time buyers cannot afford to buy a home in 92% of UK towns, a survey from the Halifax bank suggests.

Average-priced homes in 548 out of 597 main UK postal towns were beyond the means of people on average salaries, according to the study.
...
Halifax defined a town as unaffordable for first-time buyers if the average property price was more than 4.37 times the average salary.

Using this method, Halifax found that 95% of towns in the South East, East Anglia and the South West were unaffordable for first-time buyers.

But in Scotland and Northern Ireland, just 19% and 25% of towns respectively were deemed unaffordable.

UK house prices have gone crazy the last few years because of low interest rates, and because many people have diverted money from stocks to property, and because the UK is not building enough new houses. The long-term solution is to build enough houses, but the so-called environmentalists and the NIMBYs make that difficult to be achieved.

On the other hand, the Halifax criterion for affordability is stupid. First-time buyers do not, and should not expect to, buy average properties. They generally enter the property ladder where most first-time buyers have in the past, at the bottom. So using average property prices as an indication of anything is silly. Also, should single people expect to be able to afford to buy their own house (i.e. by themselves)? Most people buy properties in partnership. It is household income rather than single-person income that is relevant.

And the crazy house prices are not a problem just for first-time buyers. The crazy house prices are a problem for everyone except the developers and the people exiting the house market (e.g. moving abroad or dying). Almost nobody who does not currently have a property in London can afford to take a job and live there because house prices in London are astronomical.

With these kinds of hysterical reports the government is forced by the media to respond (apparently Blair has already to this report). Unfortunately the "solution" is usually worse than the problem. In this case the usual suggestion is to remove stamp duty (a purchase tax) for first-time buyers. First of all, many first-time buyers are rich, for example, they have worked abroad for N years and then come back to the UK with a huge pile of cash to spend on a house. Why should they get a tax break? More generally, why are first-time buyers more worthy than any other buyer?

Finally, subsidising first-time buyers (or any buyers) by itself pushes up house prices (they have more money to spend). Of course the Halifax and other mortgage companies benefit from loads of new mortgages and from house price inflation, which is perhaps why they periodically float stories like this.

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