A 20% down payment for an average UK home has jumped to a record 110% of average incomes over the past year, making ‘raising a down payment a significant challenge for potential first-time buyers’, says the Nationwide Building Society.
That figure rises from 102% of the pre-tax income of a typical full-time employee 12 months ago, the Mutual’s November House Price Index Affordability Report shows.
The study also pointed out that the house price to FTB earnings ratio stood at a record high of 5.5 in the third quarter of this year, above the previous high of 5.4 in 2007, and well below above the long-term average of 3.8.
London continues to have the highest house price to earnings ratio at 9.0, below its record high of 10.2 in 2016.
Scotland continues to have the lowest house price to earnings ratio in the country at 3.4, followed by the Northern region at 3.5.
Andrew Harvey, Senior National Economist, says: “One of the consequences of high house prices relative to incomes is that it makes raising a down payment a significant challenge for first-time buyers. potential.”
He adds: “House prices have continued to rise faster than profits in recent quarters, meaning affordability is increasingly tight.
“Due to historically low interest rates, the comparative cost of servicing a typical mortgage is still well below levels seen in the run-up to the financial crisis. However, even on this measure, affordability becomes more difficult.
“The cost of servicing a typical mortgage as a share of take home pay is now above its long-term average in the majority of parts of the UK. In contrast, before the pandemic, this was only the case in one region – London.
Markets continue to assume that the Bank of England’s Monetary Policy Committee will raise interest rates early next year.
Harvey says: “Obviously much will depend on the committee’s assessment of the outlook for growth and inflation, but investors expect the Bank Rate to be raised from its current record low of 0, 1% at the turn of the year – most likely 0.25% or 0.5% – and possibly reach 1% in 12 months.
He adds: “Despite the sharp rise in swap rates in recent months, mortgage rates have remained close to all-time lows. But that may not persist, and if new mortgage rates were to rise, it would put further pressure on the affordability of future FTBs.
The building society says a 0.4% rise in rates would increase initial mortgage payments by £34 per month for an FTB, assuming an 80% mortgage over a 25-year term.
Harvey adds: “This represents a modest increase in mortgage payments over take home pay from the current level of 31% to 32%. A 0.9% rise in rates would increase initial mortgage payments by £79 a month [from current levels]representing 34% of net salary.
“Provided the economic recovery remains resilient, higher interest rates are likely to exert a moderating influence on the housing market, as well as easing price pressures across the economy.”
Mortgage lender Ahauz co-founder Karthik Srivats adds: “With affordability stretched like never before, first-time buyers will be seeking record £10bn support from relatives and friends this year in a bid to collect a deposit.
“The hot market means the gap between house prices and incomes has never been wider, and things will only get more complicated when the government’s home buying assistance program comes to an end in 2023.
“The need for more innovative financial measures has never been greater.”