Number cruncher

I read recently that the dramatic falls in house prices are good news for first-time buyers. Presumably, a lot more people will soon be on the first rung of the housing ladder. And if more first-time buyers are going to buy houses, there must be more houses for them to buy. Unfortunately, since 2000, the rise in the number of households (generated by net migration, higher life expectancy and the preference for single-person households) has exceeded the rise in the number of available houses by around 50,000 per year. This year is no different.

But surely lower house prices must be good for those previously locked out of the housing market? Not necessarily. Each year, the number of houses potentially available to first-time buyers is roughly equal to the number of those released onto the market by last-time sellers (individuals who die, are repossessed, emigrate or move into old peoples' homes) plus new homes. So each year, there must be a way by which the number of first-time buyers who get on the ladder is restricted to the supply, after the second-home purchasers and buy-to-letters have taken their slices. If credit is freely available, the obvious mechanism is prices. House prices rise until the number of potential first-time buyers who can afford a house is reduced to the number of homes on the market. But suppose credit to first-time buyers is restricted; this works just as well and house prices need no longer do the work. This is what's happening at the moment. Indeed, even though house prices are lower, there are not enough mortgages for first-time buyers to take up the available homes. So many of the homes of last-time sellers are empty and prices are still falling.

Who benefits from this fall in house prices? Second-home buyers and first-time buyers whose parents can provide them with a large deposit. Other potential first-time buyers who could pay the mortgage still can't get on the housing ladder, because they don't have a big enough deposit.



House prices are falling because the relevant people can't borrow the money to buy them. Good news for some but not for the average first-time buyer, who is still locked out of the market.