UNLESS born into a wealthy family, achieving the dream of owning a spacious home in a desirable tree-lined avenue is, for most people, a long and fairly financially tortuous climb up the property ladder.
It begins – or, until recently, began – with buying a one-bedroom flat in a traditional tenement area, for example Gorgie Road in Edinburgh or Dumbarton Road in Glasgow.
Typically, these could be purchased through a combination of relatively low deposit and affordable monthly mortgage repayments. And, if house prices rose – as everyone expected – the flat would be sold after two or three years, with the profit being more than enough to pay for the deposit on a larger flat in perhaps a more desirable location.
The sale of the second property allowed the owner, perhaps by now married and with a child on the way, to buy a semi-detached house with garden, after which the family progressed further until the “dream” home became a reality, perhaps ten or 15 years.
Now, however, the days of the starter flat as the first rung on the ladder of home ownership may be numbered as what for many people was once the entry point to owner-occupation is turning into a dead end.
Three significant shifts in policy and thinking have led me to this conclusion: hefty deposits; static house prices and a new generation of buy-to-let purchasers.
Ten years ago, it was possible to purchase a one-bedroom flat in Dalry Road, Edinburgh, for about £75,000 on a loan of 95 per cent, meaning the buyer needed a deposit of just £3,750. Today the same flat might cost £95,000 (albeit down somewhat from the peak of the market in 2008 when the new average price exceeded £130,000) but the maximum loan would probably be 80-85 per cent, thus requiring the buyer to find a deposit of as much as £19,000. Little wonder that so many first-time buyers are not so much priced out but cashed out of the market.
As for the issue of static house prices, anyone who purchased a starter flat in 2008 is likely to have no extra equity or, worse still, be in negative equity.
Meanwhile, the renewed interest from buy-to-let purchasers is not leading to any appreciable rise in prices. The new players are from an older generation who are reluctantly moving into property only because the returns from their savings and investments have been slashed as a result of low interest rates and quantitative easing. Their immediate priority is an improved return on their money through rental income. But, to make their investment work, they need to drive a hard bargain. So, while sales have increased, prices have not – or not to any great extent.
These investors are looking for a regular return of 4 or 5 per cent and they believe that one- and two-bedroom “first-time buyer flats” can provide this. The relatively short-term occupancy of these flats is the very reason that they appeal far more to tenants than they do to first- or second-time buyers. With the prospect of very limited, short-term capital growth it makes little sense for anyone to buy a flat that they may require for only two to three years.
Often without any previous property investment experience, newcomers to this market are seeking flats that offer good rental returns and minimal risk from unexpected expenditure. Traditional tenement flats tend to be in the best, central locations but can come with the uncertainty of potential maintenance and repairs issues. Newly-built flats, such as those in Edinburgh’s Quartermile and Springside developments, are attracting investors looking for the right location and the security of owning a new property – a rare combination.
As a result of recent Scottish Government legislation that prevented letting agencies levying upfront fees, it is possible for a tenant to move into a traditional, one-bedroom flat – indeed any rental property – with a minimal outlay, while buying it might require a down payment equivalent to 20 per cent of the purchase price plus legal and estate agency fees.
Of course, there was a time when a hefty deposit might have been justified on the grounds that the eventual sale of the property would produce a large surplus, but this argument is becoming less and less valid.
Finally, as a professional letting agent, I am obliged to declare a vested interest, which does influence my thinking. However, my position does not alter basic facts, which strongly suggest that the one-bedroom tenement flat has had its day a “starter” property and will soon resume its original role as a place mainly for rent.
• Rob Trotter is senior property manager with DJ Alexander, the Edinburgh- and Glasgow-based letting agency