Building societies and first-time buyers

There is innovation within the sector, but change is needed to address the current challenges, says BSA

The Building Societies Association (BSA) is urging the next government to take decisive action on the UK’s housing crisis. In its First-Time Buyers Report 2024, the BSA, which represents all 42 building societies, as well as seven of the larger credit unions in the UK, lays out the changes needed to help today’s first-time buyers without compromising the prospects of future generations.

According to the report by housing expert Neal Hudson, mortgaged home ownership has been in decline since the mid-2000s, and in particular those with single, lower-than-average, or unstable incomes find themselves stuck in the private rented sector, unable to enter the housing market.

In March 2024, more than a third of people reported that they don’t expect to be able to buy their own home, despite wanting to. 

The biggest challenge first-time buyers face is affordability – the cost of buying a home and the cost of owning one. The average first-time buyer deposit has skyrocketed by 160% since 2005, the report says, reaching over £50,000 in 2023.

BSA’s head of mortgages and housing, Paul Broadhead, highlights a significant shift in the challenges faced by would-be first-time buyers.

“We know that, historically, almost every single quarter, the biggest challenge for people has been raising a deposit,” he said. “That’s unsurprising, given the way house prices have outstripped earnings growth over the years.

“But more recently, that’s been overtaken by actually affording the monthly payment. That’s quite a shift.”

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Recent first-time buyers may be repaying mortgages as late as their 20th or 30th year of ownership, the report warns. This could hamper mobility, savings, and the ability to help future generations with deposits.

The number of owner-occupier mortgages has dropped by more than 2 million since 2002, and BSA is calling for a long-term government strategy to deal with the problem.

“Every time we get to a general election, governments and opposition parties talk about how important housing is, how important first-time buyers are, and invariably achieve very, very little,” says Broadhead. 

“So we thought, let’s have a review of how those challenges might have changed over the last 15 to 20 years and see what we can recommend to try and overcome this.”

The BSA’s report recommends an independent review of the first-time buyer market, regulation, and government intervention. It wants policy makers to ensure that house prices do not rise faster than earnings over the long-term, through increasing the housing supply, planning and taxation reforms, and improving the private rented sector.

Broadhead stresses that the most impactful thing a government can do is to increase new housing supply, but as an immediate measure, a review of the first-time buyer market is “a sensible place to start”.  

The report also advises caution when it comes to policy solutions, stressing the need for a “balanced approach”. Although measures such as increasing the availability of high loan-to-income mortgages could provide relief in the short-term, they could also prompt a surge in demand, further increasing house prices. 

The report also recommends a review of the relative costs and benefits of a stricter regulatory environment versus the social benefits of higher rates of home ownership.

Regulations the BSA would like to revise include the 15% cap on lending above 4.5 times income, the pre and post-retirement mortgage lending market, and part-repayment and part-interest only lending, as well as lenders’ ability to offer a greater diversity of mortgage products.

“I do think since 2008, mortgage regulation has tipped probably a little bit far towards financial stability, which has stifled access to home ownership for many first time buyers,” says Broadhead, adding: “We’re 10 years on since the latest big regulatory change, which was the Mortgage Market Review. Clearly we’ve moved on economically, we’ve moved on in terms of regulation, and we’ve also moved on in terms of things like retirement ages, the way people approach retirement, the way people live, and the fact that people are borrowing for longer. So actually a review of regulation…I think would make a difference.”

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Building societies are responsible for around one-third of first-time buyer mortgage completions, and are leading innovation. For example, Skipton Building Society recently introduced the “track record mortgage,” which takes into account the rent prospective first-time buyers have paid over the last 12 months and gives them a mortgage up to that same payment amount.

Yorkshire Building Society has implemented a new £5,000 deposit mortgage, for mortgages up to £500,000, to help first-time buyers overcome the deposit barrier. Cambridge Building Society’s “rent to home” scheme allows people to rent a property from the society for up to three years, and at the end of the rental period, the society gives back 70% of the rent to use as a deposit, which can be put down on a house in the open market.

Broadhead credits this innovation to the building societies’ local ties. “We [the BSA] have not got a single building society or credit union that’s in the City of London. They’re all based out in their communities, and what that means is they are much closer to local areas of housing need and therefore they are much more likely to be able to bespoke products to address a key housing demand that might be unique to a particular area.”

Such targeted innovations are not scalable within the current regulatory environment, says Broadhead, so a review is needed, to make sure that regulation to protect consumers has the effect of encouraging, not stifling, innovation. “I think at the moment it’s probably tilted on the stifling side. So notwithstanding that the sector is doing some pretty innovative stuff, it could do much more with that regulatory review.” 

Building societies were established in the 1700s to help working people build their own homes, and this ethos remains deeply ingrained in the sector. “It’s always been that thread, that DNA that runs right through the heart of the movement,” says Broadhead.

Unlike large banking plcs, building societies are owned by their members and do not have to divert a significant portion of their profits to shareholders. “That means they can reinvest those profits into developing products that will serve those members well,” says Broadhead, who hopes the report will “focus an incoming government’s mind – solving this housing challenge is not a short-term issue. It’s a long-term plan.”

He emphasises the need for stability and continuity in housing policy, lamenting the “revolving door of housing ministers” that has hindered progress in recent years. 

“What I’d like to see is a housing minister that stays longer than just a few months, or even one year, to be able to achieve something. 

“The other thing I’d like to see is the housing minister being a full cabinet member, give them the stripes. Housing and secure housing is as important as health and defence – it’s a basic human right to have shelter, it needs a complete review.”

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