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CHAPTER THREE: ASSISTANCE FOR FIRST-TIME BUYERS

First-time buyers have suffered more than average from recent house price increases. Historically, prices at the bottom of the housing market have not moved in line with the overall housing market but, in the recent house price boom, lower quartile house prices have risen sharply across Scotland pricing many aspiring owners out of the market. ¹¹

As chart 6 shows, nearly 50,000 first-time buyers entered the Scottish market in 2002, accounting for almost 40% of all new mortgages issued. But this number fell dramatically as house prices rose, with new entrants falling to 32,000 in 2004, and the market share falling to 28%. First-time buyer activity is only now beginning to recover, albeit increasingly characterised by higher-income households.

In response to higher house prices, first-time buyers now have to stretch themselves further. According to the Council of Mortgage Lenders ( CML), first-time buyers borrowed an average of 3.11 times their household income in Scotland in 2006. Although less than the UK average of 3.21, this compares with an average of only 1.98 in Scotland during the 1990s.

The size of deposit required is often an even bigger hurdle. As chart 7 shows, first-time buyer deposit size as a proportion of household income has risen from 12% in 2000 to 35% in 2006 (an average of £2,500 to £9,000). ¹² Recent market turbulence is likely to restrict mortgage lenders' willingness to lend without substantial deposits.

All these changes have affected the profile of the 'typical' Scottish first-time buyer. Many people who would traditionally have bought a home have found themselves priced out of the market. The average income supporting house purchase rose from £19,491 in 2000 to £29,808 in 2006.

Source: CML. 1993 - 2005: Survey of Mortgage Lenders. 2005 - 2007: Regulated Mortgage Survey

Source: CML. 1993 - 2005: Survey of Mortgage Lenders. 2005 - 2007: Regulated Mortgage Survey (Figures are median deposit size as a proportion of median annual household income)

The CML reports that buyers are depending for their deposits much more on financial assistance from parents and grandparents. Recent survey evidence suggests that over half of UK first-time buyers would ask their parents for help with financing a deposit, and that parents who provide assistance are giving an average of £17,677. ¹³ There is growing evidence that increasing house prices are exacerbating wealth inequalities and spatial disparities. ¹⁴

First-time buyer households are of many different compositions. More individuals, as well as families, are aspiring to home ownership. Our research on aspirations found that 86% said they would ideally prefer to own, and that affordability was a key constraint. ¹⁵

While the difficulties faced by first-time buyers arise in both urban and rural areas, affordability varies widely across the country with local labour and housing markets exhibiting first-timer buyer trends which are distinct from the national averages. Recent local authority level data shows that smaller properties are particularly expensive relative to lower quartile incomes in the Lothians and Highland.

We are committed to helping households to meet their home ownership aspirations. The action that we are taking on housing supply will help many in the medium to long term. It is right that we provide more immediate help for first-time buyers on modest incomes who have been priced out of local markets and for those currently renting from a local authority or housing association, or on housing waiting lists, who wish to pursue home ownership.

Direct support for home ownership

To tackle this issue, we have already announced our intention to provide additional support for first-time buyers through implementing our manifesto commitment to create a Scottish Housing Support Fund. We plan to build on this by establishing a Low-cost Initiative for First Time Buyers ( LIFT) to broaden the range of products available to assist people to achieve and sustain home ownership. We will work with housing providers and private sector investors and lenders to develop the initiative to include grant, shared equity and mortgage related products and services.

The new approach we will take through LIFT involves:

• the provision of targeted assistance for different categories of first-time buyers, using both existing and new low-cost home ownership support measures;
• enabling over 1,800 households this year to achieve their home ownership ambitions through a range of low-cost home ownership programmes;
• work to establish the Housing Support Fund, as a key means of financing the expansion of LIFT, particularly through levering in private finance to expand shared equity provision for first-time buyers, and other means of providing support to first-time buyers which would be attractive to private sector investors;
• work with mortgage lenders and investors - as part of the Government's engagement with the market on the Housing Support Fund - to create innovative and viable financial products to help deliver affordable home ownership. This will include assessment of:
• • ways to lower ownership access and mortgage costs for first time buyers;
  • our proposal to make a £2000 grant available to first-time buyers; and
  • the potential of the emerging market in "green mortgages" (where lenders offer, for example, a discount on their standard variable rate if the home is energy efficient).

Through this discussion document, we are seeking views to inform both the development of LIFT and the identification of further realistic ideas and opportunities for Government and private lenders and investors to create more innovative products and services to assist people in purchasing their first home.

Currently, the majority of Government-subsidised homes for low-cost ownership is delivered through the provision of housing on a shared equity basis. This enables people to purchase a shared equity home in partnership with a Registered Social Landlord, using a government grant which is recycled when the house is sold or the owner increases their stake in their home.

The scheme comprises both "new supply" shared equity, which adds to the overall supply of housing stock, and an "open market" version which helps people to buy existing properties on the open market. The new supply scheme is the dominant form and is currently available across Scotland in both urban and rural areas. The open market version is currently being piloted in the Lothian region. There are positive indications that the private sector is particularly interested in the potential of shared equity as a specific vehicle around which to structure private investment into the Housing Support Fund.

As part of LIFT, we will take forward the testing of open market shared equity in a further six local authority areas which are facing particular pressures (Aberdeen, Aberdeenshire, Moray, Highland, Stirling and Perth and Kinross). This will test further the demand for the scheme and the practicalities of its operation in different areas and will inform the Government's discussions with private investors over new private funding. We will target the expanded pilot more efficiently than was the case previously and promote it more actively to those in the social rented sector and on lower incomes.

Uptake of the scheme by those in the social rented sector with home ownership aspirations will provide the added benefit of freeing up social rented homes for those on waiting lists. We will also look closely at the pilot's application in rural areas, and especially at its operation alongside the Rural Home Ownership Grant, a grant mechanism that assists individuals in rural and remote areas to procure their own home. Testing the pilot in areas like the Highlands and Aberdeenshire will give us a better insight into the most appropriate ways of helping first-time buyers in rural and remote communities in future.

Questions

6. How should different types of assistance within LIFT be targeted?

7. How could the Government stimulate more innovative mortgage and related products and services to assist people in purchasing their first home?

8. Should the Government provide direct cash grants to first-time buyers?

The Single Survey

The introduction of the Single Survey to the house buying and selling process in late 2008 will further support our ambitions to help households meet their home ownership aspirations. The Single Survey will mean that sellers of houses will have a duty to provide a detailed survey of the property to buyers on request. It will provide house buyers with more information about the condition of the property, together with an energy report, information on accessibility aspects of the property and a valuation.

The survey will save buyers money as well. It will be provided by the seller, so buyers will not run the risk of repeated expenditure of hundreds of pounds on surveys or valuation reports on properties where their offer is unsuccessful. This change in approach will be of particular benefit to first-time buyers, who typically will save at least £200-£300 on the cost of buying their first home.

Expanding the range of affordable housing to buy

Current Planning Advice makes clear that "affordable housing" can take a number of forms, not just publicly subsidised housing for social rent and various types of low-cost home ownership. This recognises that there is a place for unsubsidised affordable housing, usually in the form of entry level housing for sale, where it can be clearly demonstrated that these homes will meet the needs of, and be affordable to, groups of households identified through a housing needs assessment.

Experience suggests that this particular category is infrequently factored into the planning of developments and there is scope for local authorities to give much greater consideration to this option in their negotiations over affordable housing contributions. The key, however, is the provision of homes that are genuinely affordable. Many homes that are described as "entry level housing" or "starter homes" are priced outwith the realistic purchasing power of most first-time buyers. There is clearly a healthy pool of potential purchasers in this segment of the market and we invite local authorities and the house-building industry to consider how more can be done to meet the aspirations of people who find themselves in this position.

Question

9. How can the private house-building sector play a bigger role in providing, without public subsidy, increased provision of affordable starter homes?

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