- Ability to buy for first-time buyers (FTBs) improved by just 1% in 2011, despite falling house prices. It improved most in Northern Ireland and deteriorated most in the East of England
- Even though the average UK FTB's earnings increased, the big rise in living costs prevented further improvements in the index
- Lower house prices mean the average mortgage payment faced by a FTB household fell by £20 per month in 2011, to 51% of discretionary income, from 53% in 2010
- The average UK FTB household will have to save for 35 months from Q4 2011 to get a 10% deposit. This is one month less than they would have expected to save for in Q3. But it will still take 45 months for FTBs in London
- The end of the stamp duty holiday will raise costs for FTB, but only in the most stretched parts of the UK
Fionnuala Earley, RBS Group UK Consumer Economist says
"The RBS Ability to Buy Index improved by 1% in 2011 to its best level since 2009. But the size of improvement was hindered by higher living costs. More simplistic measures of affordability suggest a much bigger improvement than this. But by including living costs we get a much more accurate picture of the real ability to buy. Without the surge in prices of essentials, particularly transport, FTBs' ability to buy would have improved to 2003 levels in 2011.
"Even though the average FTB household's after-tax income grew in 2011, higher inflation meant that the amount of income available to save for a deposit or meet mortgage payments fell compared with 2010.
"Nevertheless, falling house prices meant that the proportion of discretionary income needed to meet mortgage payments was lower too. But a typical UK FTB will still have to save for almost three years to raise a 10% deposit, even after taking into account further modest falls in prices.
"The Governments NewBuy scheme will underwrite buyers of new-build properties who have a minimum 5% deposit. But at around £10,000, even saving a 5% deposit will be a hurdle for those in London and the South East of England. On top of that, the end of the stamp duty holiday will hit this same group of FTBs who are already the most stretched. They will face a stamp duty bill of more than 10% of their annual discretionary income."
Ability to buy
Squeeze on FTB incomes prevents ability to buy improving to 2003 levels
Ability to buy for FTBs improved by 1% in 2011 as a whole compared to the previous year. The improvement was due to a 1.4% fall in FTB house prices and a 1.1% increase in gross earnings during the year. But, it was prevented from improving further by the big rise in living costs. More simplistic measures of affordability suggest a much bigger improvement which would have brought affordability up to 2003 levels. But ignoring living costs gives a skewed version of the real ability to buy. Taking the real squeeze on FTB incomes into account, this more accurate measure helps to explain why activity has remained so subdued, in spite of the rapid improvement in house price to earnings ratios.
Regional ability to buy
Ability to buy improved most in Northern Ireland where it was 13% better in 2011 compared with 2010 - largely because of the 14.3% fall in house prices. The North East saw an 8% improvement in ability to buy in 2011 over 2011. This was mainly due to a relatively large rise in gross incomes during the year.
Ability to buy deteriorated most in The East of England. It was 8.6% worse in 2011 than in 2010 because of an 8% increase in house prices. Ability to buy also deteriorated in the North West (4.1%), Scotland (1.2%) and London (0.8%). The combination of rising prices and falling discretionary income accounted for the fall in London and the East of England. In the North West falling income was to blame, while in Scotland it was higher house prices.
Rising transport costs eat into FTBs' available income
Inflation increased in the UK throughout 2010 and 2011. In 2011, consumer prices increased by 4% compared with 2010, but prices of essentials increased more. Food prices rose by 5%, utility prices by 6% and transport by 8%. Higher transport costs hit FTBs hard as spending on this alone takes up one sixth of their discretionary income. Food takes up 11% and utilities 4%. So, even though earnings increased in 2011, higher prices of all essentials mean discretionary income fell by 0.4%.
Gross earnings for the average FTB household averaged £24,905 in 2011, but after tax, national insurance and spending on essentials, discretionary income was just £13,205, 69% of gross earnings. This proportion fell in every part of the UK in 2011, except in the North where it was unchanged. The lower proportion of earned income left really shows the squeeze on funds that potential borrowers have to spend on mortgage payments or save for their deposits. But inflation is now falling and this should help ability to buy to improve more quickly during 2012.
Falling house prices are helping ability to buy
The price of an average first- time buyer house fell by 1.4% in 2011 and is expected to continue to fall in 2012. Lower prices are good news for FTBs because they have to borrow less and save a smaller deposit. Mortgage payments faced by an average FTB household in 2011fell by £20 per month in 2011. As a result it only took up 51% of discretionary income in 2011 compared with 53% in 2010.
Mortgage payments took up a smaller proportion of discretionary income everywhere in the UK except in the North West and the East of England. In the North West it was because this region had the biggest fall in discretionary income in 2011 (3.8%). In the East of England it was because this region saw the largest increase in FTB house prices (8.3%). Northern Ireland saw the biggest fall in the burden of mortgage payments in 2011. They fell from 59% of discretionary income in 2010 to 50%.
How long to save for a deposit?
It still takes almost three years for the average FTB household to save a deposit
The fall in discretionary income means that, in many parts of the UK, a typical FTB household will have to save for longer to raise a 10% deposit. On average a UK FTB household in Q4 2011 would have to save for 35 months This is only one month less than they would have expected to save for in Q3, even though the calculations take into account a modest fall in house prices. FTBs in London still have to save for the longest at 45 months, although this is down from 47 in Q3. Scottish FTBs have to save for the least time, just 27 months, compared with 31 months in Q3 2011. Even though Northern Irish house prices fell by 14.3% in 2011, it would still take 28 months for these FTBs there to save a 10% deposit.
The end of the stamp duty holiday will hit the most stretched FTBs most
The stamp duty holiday for FTBs finishes at the end of March. This will add to the cost of buying a home, but only in some regions. The average price of a UK FTB property was £120,600 in Q4 2011. This is below the £125k threshold, so even after the end of the holiday the average UK FTB still won't pay stamp duty. But the most stretched FTBs will. FTB house prices in London, the South, South West and East of England, were all over the £125,000 threshold in Q4 2011. The stamp duty bill would take up about 11% of annual discretionary income, making things even harder for this group of FTBs to get into the housing market.