UK Edition
Hidden new-build premiums are trapping first-time buyers caught out by flats whose values dramatically trail rising local property prices, new research has found.
Findings from housing analysts BuiltPlace have shown the large gap that opens up between the price growth of new-build flats and other local properties.
In areas worst affected by the trend such as Leeds, where the cladding crisis has depressed the resale value of new-build flats, properties bought in 2000 have lagged the rising local prices by 40 percentage points.
Lenders have been spooked and are now largely unwilling to offer mortgages to buyers with small deposits on new-build flats.
The Help to Buy equity loan scheme, which grants 20pc loans (40pc in London) to buyers with 5pc deposits to purchase new-build homes, has largely bridged this gap. But when the scheme ends in 2023, experts have warned of a new-build mortgage black hole for first-time buyers.
New-build premiums are at the heart of the problem. Buyers pay extra for new homes – official data suggests an additional 20pc – because they will need to spend less cash on repairs and renovations. Buyers of second-hand properties, however, are more likely to have to fork out extra for these costs.
But there is a key difference in the eyes of lenders, according to Neal Hudson, of BuiltPlace. Second hand buyers will have to pay for these costs themselves separate to their house purchase, whereas for new build buyers these expenses are tied up in their mortgages. And crucially, these cost benefits do not last.
New-build homes sold seven years after their first sale, on average, lagged local property market price growth by around 10 percentage points, according to BuiltPlace. This meant that if local values had risen by 10pc, new-build home prices remained flat.
But there was a big divergence between different types of property. For houses, the new-build premium appeared to represent a one-off cost. After seven years, the gap in price growth between new-build and second-hand houses did not increase. For flats, however, the trend was not only more extreme, but persistent.
Leeds worst hit
In Leeds, flats bought new in 2000 lagged rising local property prices by 25 percentage points when sold 10 years later. After 20 years, the gap had widened to 40 percentage points.
In Northumberland, over the same 20-year period, new-build flat prices trailed the local market by 30 percentage points.
In addition to lost premiums, the second-hand new-build home market has been hit hard by the building safety crisis in the wake of the 2017 Grenfell fire.
Scott Bacon, of William H Brown estate agents in Leeds, said the cladding scandal had depressed local new-build resale values.
“There is a massive number of apartment buildings in the city centre where homes are now unmortgageable and the owners can only sell to cash buyers. To do that, they have to accept at least a 30pc discount. I have seen some go for half their asking price,” he said.
Leeds had been particularly badly affected because it was a compact city centre with a high density of recent construction, said Mr Bacon.
First-time buyers bear brunt
Government schemes such as Help to Buy and shared ownership, which allows buyers to get a mortgage on only a portion of a property and pay rent on the rest, mean that first-time buyers are hit hardest by disappearing new-build premiums.
When Steve Lewis, 49, bought his first home, a two-bedroom, shared-ownership flat in north London in July 2018, the property’s total sale price was £473,000.
Last summer, when Mr Lewis wanted to increase the 30pc share that he owned, he got an independent valuation. This found that the property’s value was £400,000 – a drop of nearly a fifth in just two years.
“It pushed me close to negative equity. Despite two years of repayments, I was effectively on a 100pc mortgage. I was absolutely on the edge,” said Mr Lewis.
“I was expecting a fall because of the pandemic, but I was very surprised the drop was that big. It was a real shock,” he added.
Gap widens over time
Over longer periods, while the prices of new-build properties has risen, they have done so at a much slower rate than the wider market.
Separate analysis by Hamptons estate agents found that in 2021, people who sold new-build flats after 11 to 15 years of ownership made average gains of just 6pc.
They made an average cash profit of £15,888, but this was just one fifth of the £78,376 cash gains made by people who sold second-hand flats over the same period. These properties made average gains of 35pc.
Meanwhile, people who sold second-hand houses across the same period made £99,543 in cash – a price jump of 42pc. The new-build house price rise, by contrast, was roughly half this, at just 25pc.
David Fell, of Hamptons estate agents, said: “Often part of regeneration schemes, the value of new flats have risen on the back of an area improving. Equally, however, their values have been particularly badly hit during recessions, far more than new houses.”
Concentrations of supply can also be a factor. For example, if large blocks of flats are built in city centres and sold using Help to Buy equity loans, which are interest free for five years, a large share of those homeowners will want to sell at the same time after five years.
The Help to Buy black hole
The end of the scheme will leave a gaping hole in new-build lending, with few lenders willing to offer mortgages on new-build homes to buyers with small deposits.
Nick Whitten, of property advisers JLL, said: “Help to Buy has underpinned 30pc of new build sales since it began – there is going to be a big gap to fill.”
Mr Hudson warned that if buyers were suddenly unable to get mortgages to buy new-build properties, demand would fall sharply. That could lead to levels of house building falling by a third, he added.