Two million first-time buyers are locked out

The decline of high loan-to-value (LTV) mortgage lending has led to a 1.8 million shortfall in the number of first-time buyers since 2007, a study suggests.

A report entitled "After Help to Buy: reconciling a healthy mortgage market and safe lending", by the mortgage insurer Genworth, highlights how tougher regulation and higher capital requirements for lenders have accelerated the fall in home ownership and dramatically reduced the number of people – especially younger people – who are able to buy their first home.

Genworth used government and industry data to analyse first-time buyer numbers compared with expected demand. It says the data shows that people entered owner-occupation at a consistent rate between 1985 and 2006, with 10.26 million buying their first homes, only slightly below the expected 10.29 million, based on population trends.

But since 2007 there has been an "unprecedented collapse" – a large and persistent deficit in first-time buyers. Between 2007 and 2013, 1.8 million Britons who would have been expected to buy their first home have not done so. Even with the Government's Help to Buy scheme in place, figures for the first six months of 2014 indicate that there will be 296,200 first-time buyers this year, when demographic trends suggest there should be 500,000. This annual deficit of 41 per cent, or 203,800, will push the number of frustrated buyers beyond two million.

The report highlights the impact of the drought in high LTV lending on housebuilding, which collapsed in the recession; high LTV borrowers made up 40 per cent of new-build sales before the financial crisis. The study also examines the policy response to correct the fault through Help to Buy, which has accounted for virtually all the growth in new housing in the last year.

Simon Crone, of Genworth, said: "The UK is facing a dual crisis in first-time buyer lending and low housebuilding. There is plenty of scope to improve on Help to Buy, which remains a temporary fix to a problem currently hardwired into the market. But we must avoid its removal until there is a long-term solution in place. Delaying these vital decisions will only exacerbate the issue."

Genworth suggests that a system of mortgage insurance for high LTV loans could be the answer. This type of cover already exists in varied forms in Canada, Australia, the US, Hong Kong and the Netherlands, and mitigates the risk of high LTV lending by transferring it from a mortgage lender to an insurance provider designed to bear that risk.

In theory, mortgage insurance would mean more home loans suitable for first-time buyers while also meeting regulatory demands to keep the financial system safe.

Ray Boulger, at the adviser John Charcol, said: "Apart from the human misery... caused to potential first-time buyers by the limited availability and high cost of 95 per cent mortgages, it increases the social divide. Radical action is needed quickly for there to be any chance of avoiding the serious macro-economic problems which will be caused as a result of a large increase in the proportion of the population retiring without owning a property.

"Either the Government believes the stricter regulations now in place are necessary to protect the integrity of our banking system – in which case it is hard to understand why it... [has introduced] schemes designed to get round the problems these cause – or it now recognises the regulations are causing unintended consequences, in which case it should change the regulations."