First-time buyers purchasing at 2.8 to 4x their income

publication date: Mar 10, 2016
 | 
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

First-time buyers purchasing at 2.8 to 4x their income

Contrary to popular media headlines, people buying their first home are not over-stretching themselves – and the measure of ‘average incomes versus average house prices’ is now pretty redundant.

Overall, lending in 2015 to first-time buyers was at its highest since 2007, the start of the credit crunch, with 4% more first-time buyers purchasing with a mortgage than they did in 2014. They accounted for 46% of purchases with a mortgage (in other words this doesn’t measure cash purchases, which can represent up to 30% of sales).

They are NOT spending anything like the five or 10 or 20 times their income on buying a home, as often quoted.

In actual fact, on average, first -time buyers are spending 3.48 times their income on a property which costs £156,200. But across the different countries, this can be as low as £86,000 in Northern Ireland, where they spend just 2.8 times their income.

Read - Help to Buy a New Build

The most interesting fact is that in London – where property is extremely difficult to save for and buy for first-time buyers – they have the lowest loan to value at just 75%. Conversely, in other areas, where it’s much cheaper to purchase, the loan to value is typically around 85%.

What is also good news is that because of the high level of ‘average’ deposits of between 15-25% and especially low interest rates, the mortgage costs as a percentage of income are tiny compared to what they’ve been in the past, just 18.3% of their income. This suggests that first-time buyers are well placed to survive increases in interest rates – when/if they ever come!

Of course London still remains the most expensive place to buy, but even here we know that more affordable homes are coming onto the market through initiatives such as shared ownership. A great example of this are homes from Genesis, just 13 minutes from Bank station, for just £118,000 under shared ownership. This is helping to make part home ownership at least accessible.

Prices from £118,750

First-time buyer statistics for London 2015
While the number of home owner loans fell by 3% in volume terms, first-time buyers were down by a little more; by 6% versus 2014, taking out 45,600 mortgages. However, collective mortgage value increased by just 1%, due to rising prices.

This does mean, though, that 55% of properties bought with a mortgage during the year in London, were bought by first-time buyers as opposed to home movers, according to figures from the Council of Mortgage Lenders.

From an affordability perspective:

  • Average income was £61,000 (so just over £30,000 each for a couple)
  • Average loan size was £242,920
  • Average loan to value was 75% (suggesting help from bank of mum and dad!)
  • Average loan to income was 3.94%

Despite the loan size being higher than the previous year, average mortgage payments as a percentage of income have fallen in 2015. First-time buyers are currently spending just 19.4% of their income on a mortgage, substantially less than it has been in the past, thanks to lower, competitive interest rates, especially at the 75% loan to value level.

These numbers show the futility of the figures which compare average wages to average house prices. In London it’s suggested this ratio varies between 10-20 times their income when, in actual fact, first-time buyers are purchasing with a ratio of just 3.94%. With a 5% deposit, this would increase to 5x their income.

Read - Buying a Shared Ownership Property

Why comparing average incomes with average house prices is not a measure of affordability

In 2014, the Office of National Statistics showed that the average home in England and Wales was “8.8 times the typical local salary in 2014” and in some areas they have reached “20 times local incomes”.

Just because London has an average price of over £500,000 for a home now doesn’t mean there aren’t homes available for first-time buyers at a much lower cost. On average, the CML figures show they are spending nearly £324,000 on a new property, which is nearly 40% less than the London average (Land Registry)

Northern Ireland
The property market since the millennium – and especially since the credit crunch – is full of astonishing contrasts and Northern Ireland compared to London is no exception.

Here first-time buyers were down by 1% year on year and they accounted for 56% of purchases via a mortgage in 2015.

From an affordability perspective:

  • Average income was £30,399 (so just over £15,000 each for a couple)
  • Average loan size was £86,750
  • Average loan to value was 85% (interestingly, much higher than London, despite the higher price there) Average loan to income was 2.8%

And they are spending only 15.7% of their income on mortgage payments – which include both capital and repayment.

Scotland
First-time buyers in Scotland accounted for 30,000 loans, an increase of 8% year on year but a slightly lower number of buyers at 46%, so more properties were being purchased by home-movers. Again these figures don’t take cash purchases into account.

  • Average income was £34,036 (so just over £17,000 each for a couple)
  • Average loan size was £100,000
  • Average loan to value was 84% (as with N.Ireland much higher than London)
  • Average loan to income was 3.01%

Wales
First-time buyers took out 13,000 loans out of 27,300 overall. This was up 7% by volume and 10% by value year-on-year and they accounted for 48% of loans.

  • Average income was £32,592 (so just over £16,000 each for a couple)
  • Average loan size was £106,000
  • Average loan to value was 85.2% (as with N.Ireland much higher than London)
  • Average loan to income was 3.30%

The mortgage payments are just 17.7% of their income, so extremely ‘affordable’, even if rates increase in the future.

Read - Choosing a Surveyor and Type of Survey

Source: https://www.cml.org.uk/news/press-releases/


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