London’s future first time buyers

It’s no secret that getting on to the London property ladder is a challenge. However, whilst the number of first time buyer (FTB) mortgages issued in London has fallen by -11% in the year to September 2023, according to UK Finance, this number is still slightly higher than pre-pandemic levels. This suggests that even with high interest rates and the end of the Help to Buy scheme, there is still a desire amongst FTBs to move.

Despite this keenness, FTBs do seem to be struggling to access the new build market. Savills dealbook data shows that FTBs now make up only 27% of the new build market in London down from 45% in 2021. Key issues behind this are likely related to the location, price point, and product type of homes currently being marketed, as well as the loss of the significant helping hand that was Help to Buy. But a detailed understanding of the profile of FTBs and what they are looking for can help those developers seeking to position themselves for the market recovery from 2024 onwards.

What could current FTBs afford in the new build market?

Based on current new build pricing, the average FTB with a 30% deposit could afford to purchase a 2-bedroom property in 34% of London postcode sectors.

Whilst more of London would be affordable for buyers looking to purchase a 1-bed property, demographic profiles tell us this isn’t what buyers are looking for. With the average FTB age now at 34 years, buyers are more likely to have children or be less willing to trade up the property ladder than if they had been able to buy when they were younger.

These properties also don’t account for the space needed to accommodate the shift in working practices post Covid-19. According to Q1 2023 ONS data, over 40% of workers in London are either fully working from home or hybrid and 80% of those earning over £50,000 work from home at least part time. Smaller 1-bed and studio properties are therefore not a practical option. Of Help to Buy users in London, just 9% bought a 1-bed. More than half bought a 2-bed, with 40% buying a 3-bed or larger.

In the search for more space or room to grow their families and change lifestyles, FTBs are turning to the second hand market even though these homes are likely to be of lower quality than new builds.

How can developers respond to this?

Given the popularity of 2-beds and their functionality to provide additional bedrooms and workspaces, we have used the typical size of a 2-bed apartment in London (750 sq. ft) to model where a FTB could afford as of 2023 and 2025.

We are likely at the peak of the mortgage affordability challenge, given the base rate was held at 5.25% at the last three Monetary Policy Committee meetings. From our latest forecasts, we expect mortgage rates to begin falling in H2 2024 when the Bank of England can begin cutting the base rate. Rates on a two-year fixed rate mortgage currently sit at around 5.9%; by mid-2025, Oxford Economics forecasts them to be around 4.7%, dropping to 4.1% by the end of the year and continuing to fall. These falls will ease the monthly mortgage costs for buyers.

At the same time, continued, albeit slowing, wage growth will expand the budget of the average FTB. Consequently, we expect more areas of London could become affordable to a FTB based on current new build pricing. As that affordability eases, the pool of potential buyers will increase.

Where could FTBs look to buy?

The greatest areas of opportunity for FTBs by 2025 will be in outer London, especially in East and South London. East London in particular has a well developed pipeline coming forwards in the next few years that would be affordable for FTBs in areas including Barking, Dagenham, Romford, and Hornchurch. There are also a large number of smaller schemes of fewer than 100 units around East Croydon.

There are, however, areas where no new schemes are currently being delivered. Future developments in some of the areas, especially outermost areas, may be constricted by green belt. However areas such as Bromley and Eltham, or around Sutton and Carshalton have very little future supply, and limited planning constraints.  

Our most recent survey of new build buyers found that FTBs considering or who have recently bought a new build are more willing to compromise on a property’s location above size or specification. These outer London areas not facing planning constraints may offer a more affordable route onto the housing ladder for FTBs, and identifying sites in these locations offers the best opportunity for developers seeking to capture a greater share of the new build market.

The London rental market

Many of these potential FTBs currently live in the private rented sector, which is proving increasingly unaffordable. A persistent imbalance between supply and demand has seen rents in London grow by 31% in the last two years, against full-time wage growth of 12% over the same period.

Although annual rental growth in London is set to slow from its unprecedented rates to a more normal 2.5% by 2028, renters could be spending 38% of their household income on rent by 2025. Our model looks at mortgage payments taking up a more affordable 30% of income or less.

If the competitiveness of the rental market is forcing people to look further outside London in search of more affordable rents, some may look to buying as a more secure and affordable option, especially once interest rates begin to fall.