London property: how can first-time buyers get on the ladder?
It might seem a hopeless fantasy, but it’s not impossible for first-time buyers and families to afford a home in London
7:00AM GMT 22 Feb 2014
This is not the easiest time to enter the London market. There is plenty of doom and gloom around. Prices rise while wages stay about the same. Foreign buyers snap up the prime central locations, and the price increases radiate through the Tube zones.
It is true that there are some scary numbers. The average deposit for the first-time buyer has hit £50,000, while in some areas prices are racing far ahead of wages. Last week, it was reported that wages would have had to rise £44,000 since 1997 to keep pace with rising prices in Hackney.
Peering beyond the fog of despair, however, there are options for those who know where to look. Home builders and agents, keen to help people onto the ladder, are coming up with strategies to make it easier.
“There are actually lots of ways to get into the market,” says Kate Faulkner from the advice firm Property Checklists. “It is just that most buyers are frightened off by scary deposits and average prices of £500,000.
“The reality is that average values for London are now irrelevant. They run from £228,000 to £1.2m, depending on the area. It’s an international city, and just as there are thousands of property markets across the UK, there are hundreds of different markets within London. It’s all about local prices, on local streets.”
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This is the first lesson for those trying to find a way to break into the capital: London is not just one place. There are pockets of the city that have yet to kick into overdrive and in these places there are bargains to be had.
“There are still several boroughs, where on average, prices are down by up to 10 per cent,” Faulkner explains. This includes Newham, Barking and Bexley, while Bromley, Hounslow and Greenwich are all growing less quickly than some of the more overheated areas. “Croydon does well, too,” she adds. “It is a great place to live with unbelievably good transport links across London and easy access to the countryside.”
Historically overlooked, Croydon has benefited from the recently spruced-up Overground, and the announcement that a new Westfield shopping centre will bring the area more than a billion pounds of investment. Here, and in the other boroughs mentioned, it is still possible to find properties for £100,000-£150,000.
Another trick is to look for less desirable areas next to more traditional prime locations. Elephant & Castle, for example, is close to central London and a heartbeat from the Shard, but is cheaper than Borough, London Bridge or Bermondsey. It also has several exciting new developments. Battersea might have seen plenty of smart developments at Nine Elms, but there are local pockets – around Latchmere Road, for example – that are better value.
“Renting in a hipster postcode is a lot easier than buying there,” says David Pollock of Greene & Co. “First-time buyers need to look further afield and the next door borough is often a good bet. Notting Hill is out of reach for the majority of first-time buyers, but nearby Kensal Rise has access to all the same amenities for half the price.”
Similarly, Hackney might be astronomical, but a little further out, in Clapton, there are more opportunities. Just a couple of stops up the Victoria Line from evergreen Highbury, Seven Sisters has more reasonable prices, too. Whether you are a first-time buyer or a small family looking to upsize, it might be that properties are more suitable in the less fashionable streets.
“Properties in these areas might not be exactly what people want, where they want, but it’s a start,” says Faulkner. “Don’t forget that leveraging can be a good way of upgrading to the ideal house. Buy a property for £100,000 using a £10,000 deposit. If the price grows at 25 per cent in the next five years, which is a typical London forecast, then when you sell you will get your £10,000 back, plus £25,000 to put towards the next property.”
Another way of gathering enough capital together to enter the market is to team up. In the past, it was more common to buy a house as a couple. Yet with the average age of marriage rising, and fewer people getting married at all, this is becoming less usual. Many try to buy on their own. Yet the perks of buying together are as pronounced as ever.
“Even when I bought my first home in the Nineties, I couldn’t afford to buy on my own, I bought with a friend. Things haven’t really changed that much,” says Faulkner.
Sharing a one-bedroom flat might be the only realistic option for some buyers. But if you can stretch the budget to a two-bedroom place, you can let out one room, with up to £4,250 tax-free to put towards your mortgage. In other words, if there is a £50,000 difference between a one-bedroom and a two-bedroom property, it could be worthwhile thinking bigger.
In a market expected to rise over the next few years, another tactic is to buy as soon as possible, off plan. This option is sometimes criticised for aiming at foreign investors, but it can be advantageous for first-time buyers, too.
Daniel Brown, 27, and his wife Anna, 31, have bought a two-bedroom, two-bathroom Telford Homes apartment in Poplar for £385,000. They reserved the flat in November, 18 months before the development is due to be completed. By securing the price early, they guard against a massive increase over the next year, and give themselves plenty of time to sort their mortgage finance out.
Daniel Brown, who bought his first home through Telford (JEFF GILBERT)
“Naturally, there was some hesitancy about buying our first home off-plan,” says Daniel. “But the sales team were informative, did not put any pressure on us and gave us a clear description of the layout. It has given us the opportunity to plan ahead and make our first home truly special.”
For cash-flow-conscious first-time buyers, a newbuild gives peace of mind that you will not have to undertake major works when you move in. The same cannot be said of another popular method of getting on the ladder for less – buying at auction.
Properties sold this way tend to be slightly distressed assets, being moved on cheaply by banks or other investment groups. They can be a challenge but, with safeguards, can be a great way to buy a home.
“Auctions are a fantastic way to buy,” says Samantha Collett, author of How to Buy Your Home at Auction. “But the key thing to remember is that the risks are the same as buying by private treaty: you have to do your homework. The difference is that, at auction, all the information is available beforehand. Also, you exchange as soon as you win the auction, so you need to have the deposit of 10 per cent ready. The problems arise when people don’t read the documents, or get a solicitor to read them, beforehand.”
In short, auctions can offer bargains for canny buyers. But never assume that it is the simple option. Reputable sellers include Allsop (allsop.co.uk), Auction House London (auctionhouselondon.co.uk) and Barnard Marcus (barnardmarcusauctions.co.uk).
Do not forget the Government’s much-maligned Help to Buy (helptobuy.org.uk) service, either. Doubts remain about whether the scheme is merely pouring fuel on an already raging fire. Headline figures about the number of applicants have also yet to translate into completed purchases. None the less, it has certainly helped some young people find an entry point into the market – there were 750 completed transactions by January 1.
“I assumed I would have to rent in London when I moved out of my parents’ house,” says Laura James, 26. She used Help to Buy to purchase a two-bedroom apartment at Kings Park in Essex. It is an easy commute from her job in Canary Wharf, and will become even easier when Crossrail comes to Harold Wood in 2018.
“I only needed a 5 per cent deposit,” she adds. “It has enabled me to buy an apartment that ticks every box. Most importantly, I will be paying less per month for the mortgage on my own apartment rather than wasting money renting.” One-bedroom apartments at Kings Park start at £189,000, which would mean a deposit of £9,450 with Help to Buy.
Shared ownership is another concept with a mixed reputation. Even in Islington, it is still possible to find a studio flat for £140,000. And now some developers are offering innovative new schemes. At Thames Valley Housing Association (tvha.co.uk), for example, they have introduced a model whereby owners can buy 1 per cent more of their property each year. This helps reduce costs while slowly increasing equity. It means they can avoid some of the costs of “staircasing” – increasing your share – which can come with expensive transaction fees.
For the foreseeable future, London will continue to favour those with big deposits. While it is not straightforward to compete with these purchasers, try a curveball approach and look into some of these other options. You might have to make some compromises in size, spec or area, but you could end up with a home within easy travelling distance of your favourite restaurants, bars and shops. And, who knows, perhaps you will be one of the pioneers who change the face of London.
Forget the Tube
Tube stations carry a hefty premium. Look for areas with Overground or good bus connections for better value.
It has always been easier to buy a house with someone: a partner, or a friend to spread the deposit burden.
Even with the best schemes and in less expensive areas, you will still need a deposit. Get in the habit of setting aside some money each month to make it easier in the long run.
Help-to-Buy is only one option and several lenders are now offering similar mortgages at even better rates. Make sure you explore all your options.
Broaden your horizons
If you can’t afford somewhere to live, there might be opportunities. Commercial buildings can offer excellent yields, for much lower entry prices than residential property.
Housing associations are worth investigating. You buy a proportion of the property and pay rent on the rest.
Property oddballs are often sold this way, so check for structural defects, strange lease conditions or sitting tenants. If you do your homework carefully, you might bag a bargain.
Within each London borough there are always cheaper places. Here is Savills’ list of the wards that offer the best value:
Clapton is 10 per cent cheaper than the rest of Hackney
Elephant & Castle is 15 per cent cheaper than the rest of Southwark
Lewisham Central is 4 per cent cheaper than Lewisham
Leyton is 14 per cent cheaper than Waltham Forest
Peckham is 47 per cent cheaper than Southwark
Queen’s Park is 64 per cent cheaper than Westminster
Streatham is 23 per cent cheaper than Lambeth
Tooting is 31 per cent cheaper than Wandsworth
White City is 34 per cent cheaper than Hammersmith and Fulham
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Way in to the Ilford flat.