Real estate deposits have reached a record level relative to personal income, with the average first-time buyer now spending 110% of their annual income on home security.
A 20 percent down payment on a house now costs the equivalent of 110 percent of the average annual pre-tax income of a full-time adult worker, according to Nationwide Construction Company, one of the Kingdom’s largest mortgage lenders -United.
This has increased from 102% a year ago, he said, as house prices have risen at a faster rate than people’s wages.
A first-time buyer must now save 110% of his annual income to pay a deposit
House prices have risen significantly over the past year, with the latest Nationwide index showing that a typical house was worth £ 250,011 in September, an increase of 9.9% in just one year.
Meanwhile, the Office of National Statistics recorded underlying annual wage growth of between 3.6% and 5.1% in the three months to July 2021; the most recent figures available.
Raising the house price-to-earnings ratio (RPER) is a particular problem for first-time buyers, because unlike movers, they cannot use the equity accumulated in their home to make up the bulk of their deposit. .
Andrew Harvey, Senior Economist at Nationwide, said: “One of the consequences of high house prices relative to income is that it makes collecting a deposit a significant challenge for potential first-time buyers.”
Nationwide reported that in the third quarter of this year, the price of a typical home for a first-time buyer was 5.5 times their income.
This was above the previous high of 5.4 in 2007, and well above the long-standing average of 3.8.
In 1983, when the Nationwide Index began, first-time buyers were paying only 2.7 times their annual income for a home, and at one point in 1995 they were paying a record 2.1 percent of their income. annual.
Proportional prices: Today, an average house costs 5.5 times the typical salary of a first-time buyer, but 25 years ago that figure was only 2.1 times annual income.
However, the proportion of first-time buyers receiving assistance to pay their down payment has increased only slightly over this period, from 27% 25 years ago to around a third today.
Barrows and Forrester Realtor General Manager James Forrester said: “Much has been said about the government’s success in negotiating the pandemic as it relates to the real estate market.
“While it’s fair to say the market has never looked stronger, this statement is largely based on perspective.
“If you own a home and have enjoyed a double-digit increase in value over the past year, you are definitely over the moon.
“However, those struggling to replenish a sufficient deposit are unlikely to share this view.
“The cold reality is that if you aren’t looking to buy with the financial backing of a second salary, the backing of the Mommy and Daddy Bank, or if you aren’t earning much more than the average person in your respective area, The dream of owning a home is a dream that you probably won’t realize until much later in life than you would like.
However, Nationwide research has shown that some areas are more affordable than others.
London continued to have the highest house price-to-earnings ratio of any region, with a typical house costing nine times the average wage – although this was below its record 10.2 times the wage in 2016.
Scotland, meanwhile, has the lowest house price-to-earnings ratio in the country at 3.4; followed closely by the North region at 3.5.
Nationwide also looked at the average time it would take a person earning the typical salary in each region to save a 20 percent deposit on an average property for a first-time buyer, assuming they are setting aside 15 percent of his net salary each month.
Buyers in Scotland and the North could save a 20% down payment for a house in six years, while those in London could face a 16-year wait. In the Southwest, it takes almost 11 years
In Scotland and the North it would take around six years – while in London it would take almost a decade longer. Those in the South East and South West face about 11 years of savings.
Nationwide research also looked at the cost of mortgage payments versus wages.
Right now, first-time home buyers pay about 31% of their take-home pay on their mortgage.
This is not a huge difference from the start of the Nationwide Index in 1983, when first-time buyers paid just over 25% of their income for their mortgage.
However, in the mid-90s they were only paying 15%, and a year ago, in the third quarter of 2020, just over 27%.
Interest rates are currently very low in historical terms, which is good for first-time buyers taking out mortgages, but the fact that savings rates are equally low has made it more difficult to build up a deposit. .
Director of real estate agent Benham and Reeves, Marc von Grundherr, said: “Record interest rates over such an extended period have been great for those taking their first step on the property ladder with a mortgage. , but they have been terrible for those who are trying to save.
“Unfortunately, there isn’t much that can be done, although the cyclical nature of the real estate market suggests that what goes up, will come down.
“So sitting around and waiting for a correction is probably the best immediate bet open to distressed homebuyers.”
Although it is still cheaper to pay off a mortgage than it was as the financial crisis approached, Harvey of Nationwide admitted that affordability of mortgages “was getting more difficult.”
He pointed out that the percentage of wages spent on servicing a typical mortgage loan was now above its long-term average in most parts of the UK, whereas before the pandemic this had only been the cases than in London.
“Recent pricing models suggest that an element of rebalancing is occurring where most of the regions that have experienced the strongest price growth are those where affordability is still near or below the long-term average,” did he declare.
Nationwide also looked at the impact that a rise in interest rates could have on mortgage payments, and in particular the proportion of take-home pay that the typical mortgage would need to pay off.
Rate hikes could mean marginal increases in mortgage payments for first-time buyers
It has been speculated that the Bank of England could raise its base rate as early as December, which would push up the cost of a mortgage.
He found that this would be relatively modest, especially since the majority of mortgages are variable rate.
If rates were to rise 0.40%, the proportion of wages spent on the mortgage could rise from 31 to 32% of take-home pay, or an additional £ 34 per month, Nationwide said.
However, if rates were to increase by 0.90% it could increase by 34% or £ 79 per month.
“Provided the economic recovery remains resilient, higher interest rates are likely to exert a moderating influence on the housing market, as well as ease price pressures in the economy more generally,” Harvey said.
When the Nationwide Index began in 1983, the average first-time buyer paid just over 25 percent of their take-home pay to pay off their mortgage.
And those who bought in the 1990s could expect to part with an even smaller proportion of their annual income, with the typical mortgage payment in early 1996 reaching just over 15% of their salary.
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