Bank of Scotland

Second time buyer market still at its toughest for decades despite recent improvement

25 August 2012

Homeowners looking to take their second step on the property ladder are facing the toughest market conditions for over a quarter of a century, according to the latest Bank of Scotland Homemovers Review.

  • Home affordability for second steppers is less favourable than for first-time buyers.
  • Second steppers’ current equity position would account for just 6% of the price of a typical second stepper home, compared with 40% in 2007.
  • Homemovers account for the smallest share of homebuyers since 2001.
  • The average homemover deposit in 2012 was £46,804. This is a four-fold rise from the average of £10,076 in 2002.

Housing affordability for second steppers in Scotland – calculated as the average price of a typical second stepper home less their current equity position as a ratio of average earnings – stood at over four times (4.3) gross annual average earnings in June 2012; the second highest ratio since records began 25 years ago. This affordability measure has risen significantly over the past decade from 2.7 in 2002 and is well above the long-run average of 3.2. However, it does represent a slight improvement on June 2011 when the ratio stood at 4.4, reflecting the losses faced by those who bought for the first time at the very top of the market in 2007.

Home affordability for second steppers (4.3) is also less favourable than for first-time buyers (3.4). This is in contrast to the peak of the housing market in 2007 when second stepper home affordability (3.8) was significantly more favourable than for first- time buyers (4.6).

The current affordability position for second steppers is similar to the 1990s when weak house price growth through most of the decade adversely affected levels of equity. This made it harder for the typical homebuyer to move up to the second rung of the housing ladder than it was for first-time buyers to enter the market during most of the decade.

Nitesh Patel, housing economist at Bank of Scotland, commented:
"It is clearly very concerning that the challenges facing those attempting to take their second step on the housing ladder in Scotland are the toughest for more than a generation. This follows the significant decline in house prices over recent years and the subsequent erosion of equity among those who bought for the first time at close to the peak of the market."

“The current problems facing second steppers have serious implications for the wider housing market, creating a bottleneck that significantly limits the number of homes available to first-time buyers as well as stopping many homeowners who need to move, possibly for family reasons, from doing so."

Deterioration in second stepper home affordability due to fall in house prices…
The decline in home affordability for second steppers has been caused by the recent fall in house prices. The average price paid by a first-time buyer has dropped by 15% (-£17,927) since 2008.

…leading to housing equity of only £8,000…

A study found that first-time buyers typically plan to stay in their first property for four years. On this basis, many potential second steppers in 2012 would have bought their first home in 2008, close to the peak of the housing market. As a consequence of the fall in house prices over the past four years, potential second steppers in 2012 are estimated to be in a positive equity position of just £8,094 on average.

…equivalent to just 6% of the price of a typical second stepper home
Second steppers’ current average equity position of £8,094 accounts for just 5.8% of the value of the typical second stepper property in Scotland of £139,017. This compares to a peak in 2007 when second steppers where able to fund 40.1% of their next home from the equity built up in their first property.

Historically, homeowners have typically been able to finance over a fifth (21%) of their move onto the second rung of the housing ladder from the equity built up in their starter home. This is nearly four times second steppers' average equity position in 2012.

Scotland is the third most affordable area in the UK for second steppers
Scotland is the third most affordable part of the UK for second steppers. Across the UK, the South East of England is the least affordable UK location for second steppers with an affordability ratio of 6.1, followed by London (5.9). The West Midlands (4.0) is the most affordable UK region.

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