Why you can ignore the Shelter report on FTB affordability

publication date: Apr 18, 2016
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Why you can ignore the Shelter report on FTB affordability

According to a recent report from Shelter, by 2020 first-time buyers will need:

  • An average salary of £64,000 to buy a home, up from the £52,000 they “need” today;

  • A deposit of £46,000;

  • To pay £270,000 for a property.

On average’ that might be the case – but there’s nothing average about first-time buyers.

For example, in Nottingham, ‘on average’ in the city centre, prices are around £93,000 for a property. However, first-time buyers can buy a two-bed terrace for a third less than this: around £60-70,000, in fact.

Read - First Time Buyer Quick Guide

As for requiring a deposit of £46,000, this seems to be based on the fact that first-time buyers are, on average, paying deposits of 17%. But they don’t have to do this; most of them could, if they wished, buy a house with a 5% deposit. There’s a big difference between having to do something and being able to do something, and I don’t think the Shelter report makes this clear.

Secondly, the problem with ‘forecasting forward’ in property is that every article I have read disregards the effect of a little thing called inflation which, from 2010 to 2015 rose by nearly 3% each year.

That means that if property prices and rents rose in line with other costs, you would expect them to rise by 15.65% over a five-year period. So the predicted house price rise of 23% by 2020 isn’t that much more than the cost of living.

Read - First Time Buyer Legals

The data also ignores the fact that many cities are still seeing property prices 10-25% lower than they were in 2007/8 when the credit crunch hit. In Liverpool and Bradford, if prices grow by 23% to 2020, that actually means they will have taken nearly 15 years to recover to the prices seen prior to the credit crunch!

Instead of taking the Shelter report as gospel, we all have a responsibility to make sure we give first-time buyers real information rather than scare them into thinking they’ll never get on the ladder which, in most cases, is absolutely wrong.

Is the Shelter data correct or exaggerated?
I use data on first-time buyer affordability from the Council of Mortgage Lenders, which you can find here: 
In my analysis of first-time buyer stats

These basically say that London FTBs buy with an average salary of £60k and borrow four times their income. By the way, if two people buy, that’s a salary of £30,000 each.

Go to Wales and the average income halves to £30k and it’s pretty much the same for Scotland and N.Ireland. That means two people needing £15,000 salary each.

Read - First Time Buyer Quick Guide

I don’t think the data that Shelter are using is giving the correct picture as far as salaries required now or in the future are concerned – as I say, averages seriously distort affordability in the UK housing market.

What do first time buyers actually pay for properties across the UK?
I find the best data for this is the LSL First Time Buyer Tracker:

  • Average first-time buyer spend on a property in the UK is £156,000.
  • But this is boosted upwards tremendously by London and the South East where average prices paid range from £211,000 to £314,000.
  • The East of England and South West are a bit higher, too, at £164,000 to £171,000.
  • Everywhere else, though, first-time buyers are paying less than £133,000 but this falls as low as £99,000 in N.Ireland.

So do I really think first-time buyers are going to have to pay an average of £270,000 by 2020?
No, to me this is just scaremongering and all it does is put people off saving for a deposit, especially when they told you need tens of thousands of pounds.

Read - First Time Buyer Legals

What about deposits? Do I think they will need £46,000?
No. It’s more like £10,000 for a 5% deposit – and costs to buy!

Who on earth bases first-time buyer affordability on a 17% deposit just because that’s what people can currently afford? And the main reason for this is that we have third generation home ownership now which allows Bank of Mum and Dad to make a contribution, lets not forget, 50% of people in England now own their home outright – without a mortgage!

Read - First Time Buyer Quick Guide

Why have Shelter ignored all the help that FTBs are getting?
There is also no mention in their report of the many schemes and help that FTBs are already getting including:

  • Help to Buy ISA – 25% government boost to save
  • Help to Buy new build – 20% free loan for five years 
  • Shared ownership – the ability to buy 25% or more of a property, which even at their £270,000 rate would mean a first-time buyer could buy a property for £67,000.

I am truly shocked that none of this is mentioned in the report - nor have I seen it mentioned in the press it’s generated.

Read - First Time Buyer Legals

Why doesn’t the analysis factor in the benefits of lower interest rates on mortgages? 
According to the Guardian Despite rising house prices, the mortgage market has improved considerably over the past 12 months – even for those with very small deposits”

The Guardian article states: “there are mortgages available at interest rates below 3.5% even on 95% loan-to-value (LTV) products, where the borrower only has a deposit of 5% of the purchase price.”

Back when I bought my first home, rates were in double digits.

Mortgage payments as a percentage of mean take home pay

  • This improvement in affordability is shown by the Nationwide FTB affordability index.
  • It shows that first-time buyers are paying, on average, 34% of their income on their mortgage.
  • This is a phenomenal drop from 2007, when FTBs were paying 52% of their salary on their mortgage.
  • Back in 2003, FTBs paid 32.4% of their salary on their mortgage. But back in 1989, it was 56%!
  • So yes, house prices may well have increased more than wages, but if the cost of mortgages has gone down, this needs to be taken into consideration.

Why do these stats mean ‘Generation Rentaredoomedto a ‘life in expensive renting’?
I’m afraid Shelter’s conclusion of these stats just doesn’t add up at all in my view. The only reason they would be ‘doomed’ is because the report would scare them into thinking they could never buy.

Where is their evidence for ‘expensive renting’? Yes rents are ‘high’ versus wages in some areas, but they are rising typically at 2% per year – when house prices are rising at 5% on average a year over time.

So rents are rising at less than half the rate of house prices and have done for 10 years – it’s not renting that’s expensiveit’s the cost of funding a property to rent that’s high. And in many areas, renting is no more ‘dead money’ than the mortgage interest payments to a lender.

A quick analysis I did of a two-bed property in Oxford costing £400,000 showed:

  • Renting would cost £1,150 per month

  • Buying would cost £50k for a 10% deposit; £1,600 repayments of which £1,200 were pure interest payments.

So if you want to buy a home, but are being put off by reports like this, why not download our FREE first-time buyer eBook which will go through the detail of how to get onto the ladder and show you how to research your local market rather than relying on averages which are basically of no use to you whatsoever!


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