With house prices falling, now should be a good time for first time buyers. Unfortunately, the credit crunch means that lenders have withdrawn the high loan to value facilities, meaning that most buyers now have to find a deposit of anything up to 20%, to get on the housing ladder.

According to the Department for Communities and Local Government, the average price for a first time buyer in May 2008 (the latest figures currently available) was £162,666, although it is probably lower now. This means that the minimum practical deposit for most people could be in the region of £32,000.

For many couples facing rising living costs and a degree of uncertainty over employment prospects (although there is so far little indication that unemployment is rising significantly except in specific areas such as financial services) saving this amount of capital is far from easy. They may have little prospect but to ask parents and grandparents for assistance.

Unfortunately, these groups are by no means immune from the potential impact of what the Institute of Directors has called ‘stickyflation’ (high inflation with slow economic growth), or what the Chancellor has called the end of the nice (non-inflationary constant expansion) decade. This means that providing capital to help the next generation could be difficult. Borrowing more against the value of your own home in order to provide a deposit for your children could become a memory, rather than a prospect.

While things are likely to be hard on today’s “starters”, however, there is no need to be too concerned, for a number of reasons.

First, while the fall in house prices is likely to run for some time, many respected commentators are far from convinced that we are actually going to suffer a technical recession (which is two successive quarters of negative economic growth). While inflation continues to be a threat, as long as we do not exacerbate matters with excessive wage settlements, a little belt-tightening should leave us stronger. So before house prices start to recover, young people could well be in a better position to get on the housing ladder.

Secondly, there are several things that the government could do immediately to ease matters (and may, by the time you read this, have done some of them). There are already signs that there could be a relaxation in Stamp Duty, which still starts to bite as low as £125,000 in most areas. This is an unusual tax in that it applies not to the excess over each threshold level, but to the entire purchase price, once a threshold is breached. By changing the basis, many first time buyers could save anything from £1,250 upwards. The other thing government could do to help free up the housing market is to get rid of the deeply unpopular Home Information Packs, which most buyers appear to mistrust, but vendors are forced to spend hundreds of pounds on.

Thirdly, grandparents could consider making gifts as a way of managing their inheritance tax liabilities. For most couples, the effective level at which this pernicious duty starts can be as high as £624,000 (for 2008/9) but it then cuts in at 40%. So making gifts up to seven years before death can potentially save a considerable amount of money.
It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact us.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.