As home prices hit record levels, negative equity looms

A statement from Halifax shares the “good” news: home prices paid by first-time buyers are the highest ever.

In the first half of this year, first-time buyers paid on average £207,693 for a home, the highest price on record. This is 4% higher than a year ago, and 50% higher than five years ago.

The cost of a home bought by first-time buyers “comfortably” outperformed the 42% increase in the overall housing market over the past five years, the statement says.

The situation in London is much worse, explaining why so many people in the city live in rented accommodation.

First-time buyers in the UK capital saw prices surge by 66% in the past five years, to £409,975. This average price is 48% higher than that in the second most expensive region, the south-east of England, with £276,773.

It’s worth remembering that in 2013 the government introduced a lot of measures to supposedly “help” first-time buyers, such as equity loans for 40% of the value of a property in London and 20% outside it, and shared ownership schemes.

At the same time, China started to relax its tight control on capital outflows. London and other property hotspots filled with Chinese investors eager to invest their cash as far away from their own, oppressive home as they possibly could.

On top of this, planning rules make it very difficult to build new homes in London. Developers, understandably, prefer to wait for the price of their land banks to rise to make a profit, rather than actually spend money on building homes.

Tax rules and mortgages slanted in favour of buy-to-let buyers (which are finally starting to be addressed, albeit very timidly) added to all the above factors to create the perfect storm.

And still, first-time buyers managed to weather it. According to the Halifax statement, 10 years ago 36% of all house purchases financed by a mortgage were made by first-time buyers. This year, this proportion is estimated at 47%. In 2013, when the Help to Buy scheme was launched, it was 44%.

While this is presented as good news – a sign of resilience of first-time buyers in front of adversity – I fear that it will soon turn out to be bad news.

A lot of young people bought very expensive houses at a time when interest rates were at historic lows, sometimes stretching to the maximum to afford the monthly payments. What will happen to these buyers when interest rates rise?

Of course, the Bank of England has been extremely patient, and has said it will “look through” inflation. But the possibility that interest rates begin to rise despite the Bank of England should not be overlooked.

If that happens, there will be a lot of first-time buyers in negative equity. Not the best start in life for them, and not a good sign for an economy that relies heavily on domestic consumption.