Evidence has started to emerge that just several years after the painful credit crisis of 2007-2008, the risks are growing for first-time home buyers again. The most important evidence so far has been studied in the United Kingdom, where according to press reports in July 2013, there is a growing gulf between housing prices and the average income of first-time buyers.
Buying a home for the first time has always been a risky proposition. According to financial planners Jason Alleyne and Fei Xie, new home buyers can suffer from job losses, fluctuating interest rates, slumping property values and unexpectedly high maintenance costs. Any or all of these could suddenly change their new home from a border-line affordable proposition into a dangerous financial situation. Despite these risks, home ownership remains an important life goal. Governments in many Western countries, including the United States, have tried to facilitate home ownership through government regulations and government-backed mortgage schemes.
With the 2007-2008 credit crisis seemingly receding and some regions, at least, beginning to pull their way out of the resulting recession, home buying has started to take off again. However, that’s left some financial analysts uneasy because some the factors that contributed to the credit crisis of several years ago haven’t actually been corrected.
It was those fears which sparked the latest research in the United Kingdom. According to the latest Halifax House Price Index data, published by Lloyds Banking Group, home prices have begun climbing steeply once again, reflecting good access to credit and high consumer confidence. In June 2013, prices were up 0.6 percent since the previous month, 2.1 percent since the beginning of the year, and almost 4 percent since that time last year. By contrast, the British inflation rate typically hovers somewhere below 3 percent. According to the Halifax data, the average British house now costs about £168,000 (equivalent to US $255,000).
That’s a problem, says Richard Dyson, personal finance editor at The Telegraph newspaper. Right now, says Dyson, the Halifax data shows that the average British home costs 4.58 times the average income for a British worker. That’s still lower than 2007, at the end of the credit boom, when the price-to-income ratio soared to 5.86. However, it’s also much higher than the long-term average ratio of just 4.08.
This creates a situation in which first-time buyers may feel pressured to buy at a time when they are actually increasingly vulnerable to the financial risks associated with buying a home. The higher the value of the home relative to individual income, the more families will struggle to keep up their mortgage payments if they run into difficulty because of a job loss, a serious illness or a jump in their interest rates. Yet, because prices are rising, says mortgage broker David Hollingworth, they may feel under even greater pressure to buy anyways, so that they don’t have to pay a higher price later on.
Whether the latest British data is evidence of a new systemic problem or simply a short-term blip isn’t yet clear. However, it is another indication that the credit crisis from which the world’s economies are still recovering might not be the last such crisis.