First-time buyers: how do they finance their purchases and what’s changed?

John Lewis and Fergus Cumming

The changing nature of first-time buyers

Average first-time buyer (FTB) house prices have risen by 60% over the past 15 years and homeownership has fallen. How did those who bought their first home finance it and how has this changed? i) We find that average incomes of FTBs have risen. ii) But age-cohorts with the most FTBs (e.g. millennials) have recently experienced below-average income growth. iii) FTBs are therefore increasingly richer than their classmates: in 2018 they had 1.8x the mean cohort income vs. 1.5x in 2006. iv) FTBs are also taking on bigger mortgages. v) But monthly FTB mortgage payments have actually remained flat as lower interest rates and longer mortgages mean the same monthly payment can service more debt.

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Housing consumption and investment: evidence from the Help to Buy scheme

Matteo Benetton, Philippe Bracke, João F Cocco and Nicola Garbarino

Academics have made the case for mortgage products with equity features, so that gains and losses due to fluctuations in house values are shared between the household and an outside investor. In theory, the equity component expands the set of affordable properties, without increasing household debt, and default risk. These products have not become mainstream, but in a recent paper, we study a large UK experiment with equity-based housing finance — the Help To Buy Equity Loan scheme. We find that equity loans are mainly used to overcome credit constraints, rather than to reduce investment risk. Unconstrained household prefer mortgage debt over equity loans, suggesting optimism about house price risk. Equity loans could still contribute to house price inflation: we don’t find evidence that houses purchased with equity loans are overpriced, but an assessment of the aggregate effects is beyond the scope of the paper.

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Houses are assets not goods: What the difference between bulbs and flowers tells us about the housing market

John Lewis and Fergus Cumming

A tulip bulb produces flowers. Those flowers are what people actually enjoy consuming, not the bulb. Whilst that’s blindingly obvious for tulips, the equivalent is also true for housing. The physical dwelling is the asset, but it’s the actual living there (aka “housing services”) that people consume. The two things sound very similar and are often lumped together as “housing”. But in today’s post, we argue they are as different as bulbs and flowers. Sketching out a simplified framework of houses as assets we show how this can radically change how one views the “housing market”. Tomorrow, we use this to develop a toy model and bring it to the data to shed light on house price growth in England and Wales.

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Home grown financing: How small business owners use their own houses to support investment

Saleem Bahaj, Angus Foulis and Gabor Pinter

Apocalypse Now is widely regarded as a masterpiece of the new Hollywood era. Director Francis Ford Coppola displayed audacious vision and a willingness to take risks. But we don’t just mean artistic risk. Mr Coppola gambled financially too: he staked his Napa Valley house and vineyard on the film, pledging it order to get the $32 million in loans necessary to keep the production on the road.  While his movie was exceptional, there is nothing unusual about Mr Coppola’s financial strategy.  Small business owners worldwide use their personal assets, and often their house, to back loans to their firms: in a new paper, we use microdata for several thousand firms to show how important this can be for UK investment.

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Bitesize: The rise and fall of interest only mortgages

Sachin Galaiya

The interest-only product has undergone tremendous evolution, from its mass-market glory days in the run-up to the crisis, to its rebirth as a niche product. However, since reaching a low-point in 2016, the interest-only market is starting to show signs of life again as lenders re-enter the market.

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Bitesize: Understanding housing activity in real time

Christopher Hackworth, Nicola Shadbolt and David Seaward.

While official housing market statistics are relatively timely and high frequency, they usually come with a lag of at least one month.  So indicators that lead official estimates are helpful for identifying turning points, or any ‘shocks’ to the economy.

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Bitesize: How 20-somethings are getting onto the housing ladder in London

Sachin Galaiya.

There are two ways people can make their resources go further when buying a home.

One is to increase the loan-to-value (LTV) ratio and hence increase the amount available to buy a house for a given deposit.

The other is to lengthen the term over which the mortgage is repaid, which increases the size of loan associated with a given level of monthly repayments.

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Matchmaker, matchmaker make me a mortgage: What policymakers can learn from dating websites

Angelina Carvalho, Chiranjit Chakraborty and Georgia Latsi.

Policy makers have access to more and more detailed datasets. These can be joined together to give an unprecedentedly rich description of the economy. But the data are often noisy and individual entries are not uniquely identifiable. This leads to a trade-off: very strict matching criteria may result in a limited and biased sample; making them too loose risks inaccurate data. The problem gets worse when joining large datasets as the potential number of matches increases exponentially. Even with today’s astonishing computer power, we need efficient techniques. In this post we describe a bipartite matching algorithm on such big data to deal with these issues. Similar algorithms are often used in online dating, closely modelled as the stable marriage problem.

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The ballad of the landlord and the loan

Mariana Gimpelewicz and Tom Stratton.

Who is living in private rental properties, and why? The buy-to-let market has been headline news recently. Typically the story has been profit-hungry landlords squeezing out first-time buyers. But landlords are only half of the story. This post examines the rental market from the perspective of tenants. Our work suggests demand for private rental properties cannot explain all of the growth pre-crisis, but the case for over-exuberance is inconclusive. We think that factors driving tenant demand, including demographics, social housing and credit availability, accounts for around half of the growth in the Private Rental Sector (PRS) pre-crisis and over 80% post-crisis. The most important driver post-crisis has been tighter credit conditions, which generated demand for an additional 1 million PRS properties. Looking ahead, we project that tenant demand will drive the PRS to swell by up to an additional 1 million properties between 2014 and 2019.  If tenant demand were the only factor in play this would translate to annual growth in the number of buy-to-let mortgages of 2-7%.

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