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First-time Buyer Affordability Gap Widens

Latest figures from the Royal Institution of Chartered Surveyors (RICS) indicate that the gap between house prices and earnings is nearing its record after a period of strong house price growth and interest rate rises that have taken the base rate from 4.5% to 5.75% since August 2006.

The report suggested that property in the country is now 350% less affordable for first-time buyers that it was eleven years go, at a time when getting onto the property ladder was at its easiest.

Now a couple looking to buy a home for the first time who have combined take-home earnings of £26,000 would have to save up to 90% of their annual post-tax income - £25,600 – to pay for a deposit and stamp duty to buy an average home.

Once having moved into their new home, the couple would then have to pay 44% of their take home pay on their mortgage. The highest this percentage has ever been was 48% in 1990.

RICS warned that the impact of the rate rises has not fully filtered through to homeowners yet, and the number of homes being repossessed – already on the rise – looks set to continue upwards.

London remains the hardest place for first-time buyers in the lowest quartile of earners to buy, with the South East and South West coming behind. In these regions lowest quartile earners would need to save over 100% of their combined annual post-tax earnings to simply raise a deposit and pay the stamp duty. In Yorkshire and Humber and the North West things are a bit easier, with couples needing 73% of their take home pay to buy a home.

In terms of mortgage payments, London buyers are again worst off, needing 51% of their money to pay for their mortgages. In Yorkshire and Humber it’s 33%.

David Stubbs, RICS senior economist, said: “First-time buyers are facing an enormous struggle to access the housing market. This may worsen if the turmoil in the US market forces mortgage providers to tighten lending criteria and demand even higher deposits. Even if prospective first-time buyers make it onto the market, they face mortgage payments which take up a higher percentage of their take home pay than at any time since 1990. House prices have risen by over 11% a year since 1996 whereas first-time buyer incomes have only risen by 3.5% a year. This has forced buyers to borrow ever greater amounts and now higher interest rates are applying pressure to the household finances of recent buyers.”

The good news is that we may be nearing the peak of the affordability gap. House prices are flattening or falling in most areas, and house price growth is expected to be below growth of earnings in 2008. Interest rates may also peak at 6% before the end of 2007, before coming down next year.

First-time buyers in the South borrow over 30% more than their counterparts in the North, according to research from the Abbey. The figures are £128,370 for the South and £89,189 in the North. As expected the most extreme difference is in the capital where first-time buyers borrow nearly double what a new buyer would need to borrow on average in a northern city.

Tom Smith
9th September 2007

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