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The first-time buyer numbers puzzle

First-time buyers are often heralded as the main driver of the housing market. Injecting brand new demand, they add liquidity and help to support house prices.

While the proportion of first-time buyers in the market has been falling over time, first-time buyers still account for almost 40% of all house purchase transactions in the UK.

This is a difficult figure for many first-time buyers to swallow, given the ever-increasing house prices and affordability constraints - so what is the truth of the matter?

The answer to this puzzle, says mortgage lender Nationwide, lies in the types of homebuyer that fall into the first-time buyer category. No longer can we think of first-time buyers as the fresh-faced young person, or couple, getting their very first foot on the housing ladder after saving hard for a deposit. Rather the category includes a significant proportion of buyers returning to the market, perhaps after a spell in rented accommodation or moving from dissolving households.

These buyers differ from the stereotypical picture of a first-time buyer as they tend to be older and thus on higher incomes. More importantly however, such buyers often have access to deposits funded from past increases in house prices that ease them back into the market. In 2005 'returners' may have accounted for up to 20% of all first-time buyers.

Whatever happened to the fresh-faced first-time buyer?

The implication is that there are fewer younger first time buyers. Indeed, the proportion of young people who are homeowners has fallen significantly over time.

In 1994 34% of adults aged 20-24 were homeowners. Ten years later this proportion had fallen to only 20%. So it seems that affordability may have hit the true fresh-faced, first-time buyer more than the top level figures suggest.

Affordability has deteriorated significantly over the last 10 years. Mortgage payments for a first-time buyer on average earnings would now account for around 42% of take home pay compared with only around 18% in 1996. However this still seems relatively modest compared to the height of the late 80s house price boom when the ratio was more than 55%. House prices have increased by more than 200% since 1996, whereas earnings have increased by less than 50%.

Average earnings are now around £27,500. A classic loan at three times this salary would support a loan of just £85,250. And with the average first-time buyer property costing over £130,000, a first-time buyer on average earnings would still need to raise a deposit of over £46,000 to buy a home.

A loan at four times the average salary would stretch to £110,000, meaning the borrower would still need to raise a deposit of nearly £22,000 to afford a typical first-time buy costing £131,903.

In reality, very few true first-time buyers can overcome these lending constraints in order to get a first-foot on the ladder - less than 10% of 22-29 year olds, the traditional age of first-time buyers, can negotiate this financial hurdle.

Many true first-time buyers have been priced out

Fionnuala Earley, Nationwide's group economist, commented: "Overall it is not the financing of the loan that is the biggest obstacle to the fresh faced first-time buyer - rather it is finding the deposit necessary after the income- multiple constraints."

"The reason why the proportion of first-time buyers has remained high is likely to be due to the large proportion of returners that fall into this category with access to both higher than average incomes and access to larger deposits."

"For many true, and particularly young, first-time buyers, the deposit and income-multiple constraints are too strong and prevent them entering home ownership at all. This is even before considering other calls on their income such as student debts."