FOOL'S EYE VIEW
The First Time Buyer's Dilemma

By Jane Mack (TMFJane)
September 23, 2004

Last November, housing economist, John Wriglesworth made a very bold statement indeed about the property market in 2004. It was:

"There's more chance of finding Elvis on the moon than there is of a house price crash next year."

So far, he's been proved right. There are few signs of a dramatic crash but the indications are that property prices are certainly beginning to fall slightly. Estate agents don't like to admit this, of course, because it's not good for business and are starting to use phrases such as 'sellers are beginning to price their homes more realistically' or 'house prices are steadying'.

In fact, someone commented rather amusingly on our Property: Markets and Trends discussion board that the National Association of Estate Agents had just produced a graph that, instead of showing prices were falling, illustrated how discounts were rising. "Maybe if I get ill my doctor will reassure me that the potential for improving my health has just increased", he said!

Nevertheless, it's clear the housing market is beginning to stall. Earlier this week, the Royal Institution of Chartered Surveyors (RICS) reported that they had recorded an overall decline in house prices for the first time in over a year. With fewer people registering with estate agents, buyer enquiries fell for the fourth month in succession and sales activity fell by 11% in the quarter to August, down 4% compared to a year ago.

It's probably not surprising really - there have been three interest rate rises since April and prospective buyers have obviously taken heed of rising borrowing costs and warnings from the Bank of England. However, the RICS report still says that there are few signs that a significant market downturn is around the corner claiming that a prolonged slide in prices will be avoided because of the strength of the economy and good employment prospects.

Naturally, this gives potential first-time buyers a dilemma. Will prices continue to fall and should they, therefore, wait before jumping on the housing ladder or not?

Last month, Yorkshire Bank produced some research which suggested that first-time-buyers are determined to secure their first property - no matter what the cost. Although nine out of ten first time buyers fully expected interest rates to go up again this year, two out of three were still prepared to go all out and borrow the maximum amount to get the house they wanted.

Recent figures from the Council of Mortgage Lenders show for the first time ever, the average first-time-buyer is borrowing in excess of three times their income to buy their first home and Yorkshire Bank thinks this suggests that first-time buyers are still trying to buy now and ignoring the greater risks.

Higher interest rates mean bigger repayments and, let's not forget, that falling house prices could lead to negative equity.

Of course, negative equity isn't particularly a problem if you can afford to stay put and ride out the storm. But interest rate hikes are a different matter and could prove too much for some, first-time buyer or not, so consider fixing or capping the rate if you're on a tight budget and you want the certainty of knowing how much you've got to pay each month.

Fixed interest rate mortgages are gaining in popularity particularly for those who have financially stretched themselves to the limit already and getting a fixed rate means that at least you'll know where you stand for the next couple of years or so, regardless of any nasty surprises the Bank of England might have in mind.

Personally, I think if I were a would-be first time buyer I'd probably sit it out until next spring to see what happens. But then it depends how much you want your own home because, as I've said before, the house you buy will be your home. It's not really an 'investment' so, to a certain extent, who cares about house prices?

As long as you take steps to ensure you can continue to afford to pay for it during any blips in the housing market, there's no need to fret about which direction house prices are headed.  

More: Looking Through The Housing Bubble; How to Avoid A Dangerous Mortgage; Mortgage Centre