To move, or not to move?
They peek through the window at the semi-detached house across the street. They scour the papers for news of rising house prices. They make unplanned detours to leafy neighbourhoods. Meet the second steppers. These are households who typically made it onto the housing ladder in 2007 or 2008 – and got stuck on the first rung. This may not be surprising, given that the financial crisis saw house prices plummet, mortgage lending shrivel and wages stagnate.
But five years on, the picture is very different. The market pundits are predicting a housing market recovery and the numbers back it up. In August 2013, borrowers took out 28% more in mortgages than they did in August 2012, according to the Council of Mortgage Lenders. UK house prices in July 2013 were 0.8% higher than in July 2012, Office for National Statistics figures show. And this steady rise masks sharp jumps in London and the South East. So is it time for second steppers to finally make their move?
According to Standard Life Investments strategist Andrew Milligan, the sunny economic weather is likely to continue.
“For the next six months we should see the housing market broaden and deepen,” he says.
“By that I mean more transactions taking place and more availability to move. Clearly Help to Buy will matter, but at the end of the day housing is driven by interest rates and earnings.”
Most economists do not expect any large increase in wages anytime soon. But the Bank of England’s official interest rate is at a historically low level of 0.5%. Along with other central bank policies such as Funding for Lending, this helped push mortgage rates in August 2013 to their lowest levels since records began. However, despite the Bank of England suggesting interest rates may remain low for three years or more, the question of when rates will actually rise remains a matter of debate.
“I don’t think we are looking at sharp increases in mortgage rates over the next few months but there is a little upward pressure on mortgage rates,” says Berenberg Bank economist Robert Wood.
Second steppers may also want to keep an eye on what is happening in the money markets, where perception is just as important as hard figures.
“For two- and five-year fixed rate mortgages the most important thing is whatever the market expects to happen, because banks have to borrow the money to lend it to households,” explains Wood.
Name your price
Low interest rates give second steppers a better chance of finding a cheap mortgage. Rising house prices, on the other hand, are more of a mixed blessing. On the one hand, they can help those who bought before the crash escape negative equity. On the other, they can make larger properties even more impossible to afford.
In London, the steady growth in house prices has even sparked speculation about another housing bubble. Estate agent and property commentator Henry Pryor expects the government’s launch of the second part of the Help to Buy scheme this September will push house prices in the capital up even further.
“It appears that house prices and sales volumes will increase steadily between now and the 2015 general election,” he says. “Houses are going to get more expensive. The critical thing that anyone considering a move should bear in mind is to make sure they budget for higher interest rates which will follow.”
Old vs new
Market forces are becoming kinder to the housing market. But even if there is a sudden economic shock, second steppers can benefit from a range of government schemes. The coalition may like to boast about helping first-time buyers, but its latest initiatives quietly open the door to second-time buyers as well.
Second steppers have three main choices. The first, NewBuy, will allow them to buy a new-build home with just a 5%. Some housebuilders may also offer to buy their existing property, meaning the household can move without the hassle of finding a buyer. The second is the Help to Buy equity loan, which launched in April 2013. Also restricted to new-build homes, it allows the buyer to put down a five per cent deposit and take out two loans – a 75% loan-to-value mortgage, and a loan from the government worth up to 20% of the price of the house. This second equity loan will be interest-free for five years.
“If a buyer is looking to move up because they need more space and they are limited by affordability then Help to Buy is perfect,” says Mortgage Advice Bureau new homes director Frankish.
The third option, the Help to Buy mortgage guarantee scheme, was launched in September. Mortgages offered under this scheme will allow borrowers to put down a 5% deposit on older homes, as well as new build.
“Help to Buy 2 should make the pricing of qualifying mortgages cheaper, which makes the mortgage repayments cheaper,” says Frankish.
Some second steppers may want to consider the pros and cons of going new build.
“The opportunity of buying new is you have a blank canvas,” says Frankish.
“The homes are far more efficient, and you have warranties and guarantees.
“What you have got second hand is a bigger choice of location. A lot of new build is done in areas where regeneration is happening. You may want a more established area.
“There is also a premium for new build. Should you have to sell quickly you have to consider that. If you buy a new car and then sell it, you are probably not going to get the price you bought it for. It is the same with houses.”
To move or not to move?
So should the second stepper take a deep breath, leave their poky one bed flat and head to the nearest estate agent? It depends where you live, says Your Mortgage Decisions director Dominik Lipnicki.
“Cheap mortgage rates are a factor throughout the country. But the feeling of wealth that rising property prices gives people and encourages people to up sell? That is limited mainly to London and the South East.”
A sense that house prices have further to rise or just plain affection for their current home may hold second time buyers back from taking the plunge. What is clear, however, is that 2014 holds more opportunities for second- and third-time homebuyers than have existed for the last five years.