It is a miserable business being a first-time homebuyer in the UK. Santander tells us that the average price to income ratio is over seven times. The Council of Mortgage Lenders says 18% of such buyers in London end up spending more than £500,000. And we know that nearly 60% of first-time buyers now borrow with mortgage terms over 25 years.
That's the bad news. The good(ish) news is that, in a semi-capitalist state such as ours, where there is a problem there is also always a fascinating range of solution providers knocking around. The government likes to think it is one of them: note the explicit favouritism it displays towards first-time buyers with the free money machines that are Help to Buy and the Help to Buy Isa.
But its efforts pale next to the solutions offered by the financial sector. This has put many great brains to work and come up with a set of impressively creative products to suit the needs of the nation's desperate property lovers.
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Some are old news (parental guarantees, multi-generation mortgages, cheap buy-to-let schemes up north and abroad that are supposed to build you enough capital to buy in Winchester and so on). Some are reinventions of good ideas for example the branded rental buildings going up in London for younger people who can't or don't want to buy. Look up Vantage Point Tower in Archway (where you can have dinner parties in the communal areas) and you might soon start thinking that renting isn't so bad after all.
Some are completely nuts. First up we have Gifted Deposit'. This launches in April and will allow first-time buyers to use their "social wealth" to beg family members and strangers to give them the cash they need for a deposit. They can "tell their story to a global audience" using photos and videos to "create engaging campaigns" and then sit back while the money rolls in.
This is clearly absurd. The global audience has (I hope) better causes to donate to than the bank accounts of residents of first-world nations who are mildly dissatisfied with their housing arrangements. So any donations made via this silly site will be made by family. And guess what? It doesn't come cheap. Hand over a cheque to your kid and the additional cost will be zero. Send it via GiftedDeposit.com and it'll cost you 5%. I think you get my point. There's no need to visit the site.
Still, I'm not sure that this pimped begging is the worst deposit-building idea out there for first-time buyers. Another comes from the Social Market Foundation, a think tank that considers its work to be "characterised by the belief that governments have an important role to pay in correcting market failures".
To this end it has produced a report, sponsored by a property crowdfunding business, which suggests that crowdfunding could be a good way for first-time buyers to build up deposits particularly if the government could be persuaded to let those with Help to Buy Isas invest them via property crowdfunding sites.
Property crowdfunding is pretty straightforward in theory. You go on to a website such as Property Partner or Propnology and you choose a property or properties in which to invest. You end up with shares in a company set up to own the property. It gets rented out. You get some yield. At some point it is sold and you get the capital returns too.
This isn't a terrible idea. It's an easy way to get into the property market, it's mostly unleveraged, and if you just want long-term diversification into the residential property market you could, I suppose, look at some of the options. However, for anyone attempting to build up a deposit it is madness for two reasons: cost and liquidity.
Most firms take 2%-5% of your investment upfront as a finders/administration fee. They then take a percentage of any rent (10%-15% seems the norm) and on top of that there will be all the usual costs of property ownership. The net yields on the properties offered by Property Partner appear to be a mere 2.94%. You will be relying almost entirely on getting your returns via capital gains.
That might happen, but what if you want to get your hands on those gains? You can try and sell via a relisting on most platforms but that isn't going to get you the same market value as selling the whole house. Or you can wait until the platform lists the property for sale itself to get your money out. But however you do it, it isn't going to be easy or quick.
That matters. Imagine you are saving for a deposit in a savings account, and property prices start to fall. You'd be thrilled. Now imagine the deposit you've saved is already tied up in a property and it's a property that you can't live in and you can't sell. Not thrilled now, are you?
All this makes me pretty irritated. Those grandstanding about the misery of first-time buyers have come up with no end of ideas. But if you are genuinely passionate about their plight you could do something that might actually help.
You could demand that stamp duty is abolished (it eats up cash that could be used in a deposit). You could call for an immediate end to Help to Buy, which, according to Capital Economics, has given us a "sharp rise in average house prices". You could petition for the normalisation of interest rates or the reversal of quantitative easing both of which could easily bring down house prices (and hence deposits) with a nasty bump.
You could call for a land value tax something that would deal with the London bubble even faster than the oil baron capital repatriation is currently doing. You could insist on the softening of planning restrictions. And of course you could demand even more of a massive infrastructure build in the south than we are seeing already (houses need roads, train lines, sewers, electricity and superfast broadband).
You could do all these things and if you got your way on even a few you could really make a difference. But addressing our jammed up and overpriced housing market by suggesting that the young and sort-of-broke get into property crowdfunding doesn't address market failure. It just adds personal financial risk to public policy failure.
This article was first published in the Financial Times
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