Why the mortgage drought is good for first-time buyers

First-time-buyers should thank their lucky stars for the credit crunch. The downturn in the property market may mean they can afford a home at a reasonable multiple of their income.

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Britain is enduring its "worst housing slump since the 1970s", reports The Telegraph this morning.

Mortgage approval figures from the Bank of England yesterday were nothing short of appalling. The number of mortgages approved fell to an all-time low of 42,000 in May. That's a 64% drop year-on-year, and down from 58,000 in April.

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"Economists warned that the property market was entering a prolonged downturn that would match the slumps experienced during the 1990s and 1970s, the two major corrections since the Second World War", said the paper.

How times change

This housing bust will be worse than anyone expects

If you ever wanted an object lesson in how 'experts' go into denial when they're proved wrong by events, then the property market has delivered a pretty good one.

Just over a year ago, the pundits all said that British house prices were going to keep rising at a rate slightly above inflation. After all, there weren't enough houses being built for our steadily expanding population - how could they ever fall? Soaring prices were nothing to do with loose credit. Low interest rates were a permanent feature of the brave new globalised world. And with too few houses to go round, supply and demand meant that you couldn't go wrong with bricks and mortar.

Then the credit crunch hit. Suddenly those permanently low interest rates were no longer a guarantee of permanently low mortgage rates. The experts started to suggest that house price rises might slow down a bit. They'd still go up, of course - supply and demand, remember? - but maybe they'd be flat in real terms.

Then, by the start of this year, people were starting to realise it was serious. House prices might even see low single-digit percentage falls. Though of course, that had to be viewed against the fact that they had risen by around 180% in the past decade. A bit of a correction was hardly a surprise - necessary for the health of the market, even.

Then prices actually started to fall. Now the pundits told us we were in for a real slump - but it wouldn't be as bad as in the 1990s, because after all, unemployment was low and interest rates were 'historically' low.

Now we've seen mortgage approvals fall to their lowest level ever. Even the most ardent property bull cannot deny that this is a housing crash of epic proportions. It's as bad as the 1990s and the 1970s, we hear.

So now we get all the hand-wringing about 'poor' first-time buyers. The same pundits who've been merrily promoting rising house prices as being a good, economically healthy thing, are now weeping for those little first-timers left abandoned, bereft of a home. How dare these selfish banks and building societies cruelly deny these young innocents their human right to saddle themselves with a dirty great wodge of debt?

Don't shed tears for thwarted first-time buyers

Just in case these people hadn't noticed, it's actually been quite difficult for first-time buyers to mount the property ladder for quite some time. Anyone sensible enough to want to buy a home at a reasonable multiple of their income, and who might even have had the audacity to opt for a repayment mortgage, rather than interest-only, would have found it impossible to do so for a number of years now.

As for those few would-be first-time buyers who still wish they could borrow 100% interest-only 'to get on the ladder', they should thank their lucky stars. They have been saved from their own stupidity by the credit crunch.

Banks and building societies have stopped lending because they don't have the money to do so. And that's basically because they were too careless with the first load of money they dished out. Now they have to rebuild their balance sheets. They're doing that partly by raising money from overseas investors and existing shareholders. And another way they're doing it is to make sure that any loans they do write are profitable and safe.

That means they don't want to risk being left holding a loan that's worth more than the house it's secured against. As many bloggers have pointed out, including the BBC's Robert Peston, the fact that banks are asking for 25% or 10% minimum deposits shows just how far they think prices will fall.

Yet even 25% looks pretty optimistic now. As Howard Archer of Global Insight tells The Telegraph, his prediction of a 24% fall from the August 2007 peak might be "a little conservative." The current slump has happened against that much-vaunted backdrop of low unemployment and low-ish interest rates. "If the economy starts to tank and unemployment rises sharply - and it has increased for the last four months - that would have a large knock-on effect on the housing market, as a number of distressed sellers enter the market."

Figures out from Nationwide today don't offer any respite. House prices fell another 0.9% month-on-month in June, and are now down 6.3% year-on-year. From their peak in October (by Nationwide's data anyway) they are now down 7.3%. In fact, if you bought an average property in July 2005, you are sitting on a mere 9% gain, reckons the building society. Take away inflation and you're left with pretty much nothing.

As bad as the 1990s and 1970s? Afraid not - it's going to be worse. Stranded first-time buyers will be fine - by the time banks are willing to loosen lending standards a bit, prices will have fallen to a point where houses are nicely affordable again. It's the ones who bought in the first six months of 2007 with interest-only mortgages that we should feel sorry for.

Turning to the wider markets

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The FTSE 100 ended Monday's session up 96 points at 5,625. Higher metal prices and rumours of bids sent the mining sector higher, while oil stocks also rose as oil hit a new record high.

Over in Europe, the Paris CAC 40 rose 37 points to 4,434. Meanwhile, the German Xetra Dax was down three points at 6,418.

In the US, the Dow Jones Industrial Average tried to rally after last week's sharp falls but ended up just three points higher at 11,350. The Dow is now down 19.8% since its October 9 high of 14,165, a shade outside official bear market territory of 20%. The wider S&P 500 gained 1 point to 1,280, while the tech-heavy Nasdaq Composite slid 22 points to 2,292.

Overnight, in Japan, the Nikkei 225 fell for the ninth session in a row, its longest losing streak in nearly four years, according to Bloomberg. The index lost 18 points to 13,463.

Brent spot was trading this morning at $140.60, and in New York, crude oil was at $140.98. Spot gold was trading at $928 an ounce. Silver was trading at $17.48 and Platinum was at $2,067.

In the forex markets this morning, sterling was trading against the US dollar at 1.9984 and against the euro at 1.2682. The dollar was trading at 0.6347 against the euro and 105.79 against the Japanese yen.

And this morning, music and games retailer HMV reported that annual profits rose to £89m in the year to April 30, from £16.1m last year. £51.8m of the gain came from the sale of its Japanese unit, while soaring sales of video games accounted for much of the stronger performance at its stores.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.