First-time buyers have been among the worst casualties of rapidly rising house prices and stretched affordability levels in recent years. Now the house-price tide has started to turn, many will be hoping values are about to fall to a level at which they can finally get their foot on the first rung of the ladder. Let’s not get too carried away, however: it’s true prices have fallen over the past eight months, but average values are simply returning to the levels seen in February last year. The reality is that there is still a long way to go before getting on the ladder becomes truly affordable again.

While the affordability equation for first-time buyers is being helped by falling prices, any benefits are largely offset by changes in the terms of mortgage finance. A year ago, for example, it was possible for a first-time buyer to borrow more than 95% of the value of a property. Today, most companies have reduced the maximum they are prepared to lend to 90%. With a typical two-bedroom city property currently averaging £190,000, the change in lending criteria means a first-time buyer will have to find an additional £9,500 towards their 10% deposit. Looking at it another way, prices need to fall by 5% just to offset the changes in the mortgage market – and that is before any allowance is made for higher interest rates. The reality is that prices need to fall much further to start pricing a sizeable volume of first-time households back into the market.

The pressure on first-time buyers has been building for some time, and their numbers have been dwindling. In the 1980s, when the owner-occupation rate was still rising, first-time buyers accounted for more than half of all purchases; by last year, that was down to just a quarter. Data from the Council of Mortgage Lenders suggests half of those receive some form of financial help – which means those buying entirely from their own funds accounted for just one in every eight purchases.

With the population continuing to expand, much of this displaced first-time-buyer demand is now focused on the private rental market, where rents are starting to go up quite quickly – the rise exacerbated by a slower growth in the number of homes for rent. Average rents have risen by more than 6% in the past year across Britain’s cities, with some places seeing increases of as much as 20%.

Despite this, the weekly cost of renting a two-bed home is still 26% lower than the cost of buying with an average 90% mortgage. This market dynamic will keep an upward pressure on rental values in the short term. Rental growth will start to slow once the cost of getting on the housing ladder starts to fall, primarily through lower mortgage rates, or when the local market cannot sustain higher rents and void levels start to rise.

Prices may be falling, but the cost of accessing the housing market as either a first-time buyer or renter has been rising, while the likely sources of relief look few and far between in the short term.

Richard Donnell is director of research at Hometrack David Smith is away

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