Western banks now demand higher deposits when lending to first time buyers. The Bank of England expects this to increase the average age at which first-time buyers buy a home, and reduce home ownership.
This will hit demand for home furnishings and appliances, unless companies change their approach to the market.
The Bank’s conclusions apply to other western countries. The reason is that 5 years ago, most banks were offering mortgages worth 95% of property values. So new buyers only had to save for a 5% deposit. This took them 4 years if the home cost 4 times their annual income.
Now, however, banks are typically demanding deposits of 20% – 25%. As the Bank’s chart above shows, this means people have to wait longer before they can buy. On the assumption that people typically begin to plan for home purchase at the age of 28, the average age of first purchase:
• Was 32 years (red line) in the mid-2000s. Buyers began saving at 28 years, and achieved the 5% deposit after 4 years
• Will rise to 44 years with a 20% deposit. It takes 16 years of saving
• Will rise to 36 years (green dot) even if they double their savings rate to 10%. It still takes 8 years of saving
Home ownership rates thus fall from 71% to 52% (at 5% saving) or to 65% (at 10% saving). And the Bank notes that in the short-term “the flow of buyers falls very sharply”. Instead, rental demand increases.
This shift also reduces demand for home furnishings and appliances.
Landlords are much less likely to replace these items than homeowners. They value their profit more than a tenant’s comfort. Equally, young people saving for a higher deposit will have less spare cash to buy such items themselves.
This is yet another example of the dramatic changes in demand patterns that are taking place as we transition to the New Normal.