The dream of homeownership has slipped farther from the reach of first-time buyers, who have been unable to afford a home because of the credit crunch.
They are being squeezed again, by surging rents - up by almost a third in some areas - and by yet another increase in borrowing costs.
Monthly bills for a rented home have risen by an average 11.7 per cent across Britain in the past year, according to research from Paragon, a buy-to-let mortgage lender.
Tenants in the South West have been hit hardest, paying almost 30 per cent more in rent than a year ago, with those in East Anglia, the North and Yorkshire reeling from increases of up to 25 per cent.
Banks turned the screws even tighter yesterday when they raised the cost of borrowing, increased rates and demanded bigger deposits. One lender, Woolwich, will require as much as 20 per cent of the value of the property on many of its popular mortgage deals.
The difficulty in raising such high deposits, particularly for first-time buyers, accounts for the fall in mortgage approvals. According to the British Bankers Association, approvals dropped by more than half in May to a new low of 27,986 loans. Since April last year the number of first-time buyer loans has also fallen by 35 per cent.
Mortgage approvals are a key indicator of the health of the housing market, and these latest figures suggest that house sales could halve this year, down from a peak of 1.78million in 2004 to an estimated 1.17million.
Mike Goddard, chief executive of Belvoir, the largest lettings agency, said: “The lettings market is booming and what that's doing is pushing rents up. Demand is increasing from first-time buyers, who are finding it even more difficult to get into the market.”
Katy Waite, a director of the County Homesearch Company, said: “Many of our clients are facing the prospect of being gazumped after bidding for properties to rent. Landlords have people queueing up, ready to pay full deposits on the spot and the full rental price without question.”
The Association of Residential Lettings Agents said that almost 40percent of agents had more customers than properties to house them in. Tenants were choosing to stay in their rented homes longer and properties were standing empty for shorter periods.
According to Paragon, the sharpest rise in rents was for houses, with a detached property costing 36 per cent more to rent, at £21,135 a year, than last summer. These increases are proving a rare boon for investors, who are now enjoying the highest returns on their properties, at 6.4 per cent a year, in two years. These returns - or yields - had been in decline during the housing boom, when property prices leapt up faster than rents.
Apartment rents have been kept relatively steady - up 3.3per cent on last year - by the oversupply of new flats in many cities, such as Leeds, Birmingham and Manchester.
Rising rents and bigger household bills will make it more difficult to save for a deposit. Lenders have withdrawn all 100 per cent mortgages and most 95percent deals. To get a decent rate, first-time buyers need to pay a deposit of at least 10 per cent, equal to £17,510 on a £175,093 property, which is what most first-time buyers can afford. According to National Savings & Investments, this would take almost ten years to save up.
Although buy-to-let investors are enjoying increased demand for their properties, they have not escaped the squeeze, with rates of up to 10.05 per cent on loans. The Bank of Ireland will raise rates today for landlords on its five-year fixed rate buy-to-let deal by 0.6 percentage points to 8.09 per cent. This comes after the bank's decision to reduce the maximum loan size from 85 to 75percent of a property's value.
The amount of rent landlords must receive to cover their mortgage has increased to 125 per cent of their repayments, up from a minimum of 100 per cent on last year.
Melanie Bien, of Savills Private Finance, the independent mortgage broker, said: “Landlords are trying to ease the pain of rising buy-to-let mortgage costs by increasing rents. They can do this because rental demand is greater than supply and tenants have to pay decent rents to get the best properties. Those first-time buyers who are being forced to rent for longer because they cannot afford to get on the property ladder are also paying more rent in the meantime, making it harder for them to save up a deposit to purchase a home of their own.”
Howard Archer, a chief economist for Global Insight, said that the housing market was “being throttled by stretched affordability and tight lending conditions”.
George Osborne, the Shadow Chancellor, said: “These figures show that homeownership is being pushed beyond the reach of millions under Gordon Brown. This is yet another blow to people wanting to get a foot on the housing ladder.”
Woolwich, the lending arm of Barclays, increased the amount needed for a deposit on some of its most popular deals from 10 to 20 per cent. On a £200,000 property, a borrower would need to pay a deposit of £40,000 for a five-year fixed rate mortgage. Woolwich also raised
rates by up to 0.4 points on some tracker deals while Bristol & West increased some of its rates by 0.7 percentage points and withdrew 95 per cent loans.
An average two-year fixed-rate mortgage has risen above 7 per cent, for the first-time in 11 years, according to Moneyfacts.co.uk, the price comparison service. Only six months ago homeowners could obtain a rate of 5.4 per cent on a two-year fixed rate mortgage. On a £150,000 home loan, the increase in two-year rates since the beginning of this year has added almost £1,300 to the total cost of taking out one of the deals.
Experts said that higher mortgage costs were forcing more cash-strapped borrowers into voluntary debt management plans, with applications for individual voluntary arrangements rising by 34 per cent since the start of the year.
Market observers said that rents could not continue to rise at such rates. Simon Rubinsohn, an economist at the Royal Institute of Chartered Surveyors, said: “Rents have been moving along swiftly but there are some signs that the massive increases have already taken place and the market has begun to lose some of its upward momentum. There may be some resistance to higher rents given that household budgets are under such pressure.”
Lucian Cook, a director of research at Savills, said: “Tenants are ultimately more flexible and are not tied to a particular house. They are more footloose.” Savills predicts that rents will be 4 per cent higher than 2007 prices by the end of this year.
Hurford Salvi Carr, an agent in Central London and Docklands, said that rents had been suppressed by a flood of homes that owners had been unable to sell. Hamptons International reported that the supply of homes for rent had jumped 40 per cent since the onset of the credit crunch, and the number of potential tenants had risen 9 per cent.
The latest housing market survey from RICS, released this month, showed that transactions are at their lowest level since 1978, because sellers are unable to offload their homes amid a collapse in housing market confidence and predictions of further falls ahead. Revenue & Customs reported this week that transactions had fallen about 40 per cent in a year to 100,000 a month.
The increase in rents has helped longstanding buy-to-let investors, with properties in which they have large amounts of equity. Many have been able to strike advantageous deals with lenders, it has been reported.
John Heron, managing director of Paragon, said: “Investors remain better placed to buy property than most owner occupiers or first-time buyers.”
