While average mortgage payments have fallen to 2003 levels, it is now more difficult for first-time buyers to get a foot on the housing ladder than during the 2009 recession, according to a new survey from RBS.
The Ability to Buy Index makes pretty morbid reading for any would-be buyers and estate agents selling first-time buyer stock. Fionnuala Earley (below), RBS Group UK Consumer Economist, says: “Our new index provides the most accurate picture available today of the squeeze on first-time buyers, by including the effects of tax, National Insurance, earnings and rising living costs, in addition to house prices and interest rates.
“Our first results show that higher living costs are making it more challenging for first-time buyers to enter the market, despite the lowest mortgage payments in almost a decade. But the news is not all bad – inflation is now beginning to fall and assuming earnings still rise and interest rates remain low, this should help to improve the ability for first time buyers to enter the market.”
The rising cost of essentials during 2011 has outweighed the effect of falling house prices and rising incomes on the ability to buy. Ability to buy has deteriorated most in the East of England, East Midlands and London since 2009. The biggest improvements were in Northern Ireland and the North East.
But the results also contain some encouraging news. Low interest rates mean that even with the squeeze on household income, the debt-servicing burden has fallen to 2003 levels.
Low interest rates and squeezed discretionary income also mean that it will take a long time to save for a deposit, but not as long as in 2007. Assuming that house prices stay still, earnings grow at a modest annual rate of 2.5 per cent and FTB can save 30 per cent of discretionary income, it would take three years to save a 10 per cent deposit.
“It is a little surprising that even though house prices are falling and incomes have increased, FTBs are squeezed more now than they were during the 2009 recession,” adds Earley. “The rising cost of essential goods and services has eroded their discretionary income. But low interest rates are still a tremendous help. A 90 per cent loan for a first-time buyer would take up just 52 per cent of available income today compared with 84 per cent at the market peak. This gives borrowers a much bigger financial cushion. But lower discretionary income and low interest rates mean saving for a deposit is still a hurdle.”
