Best conditions for first-time-buyers in 3 years

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Best conditions for first-time-buyers in 3 years

Economic Analysis

10 September 2012

The fourth RBS Ability to Buy Index for first-time buyers shows:

  • First-time buyers’ ability to buy improved to its best level since Q2 2009
  • Rising income and changes to tax and National Insurance allowances put an extra £430 into first-time buyers’ pockets compared to 12 months ago
  • But rising cost of living wipes almost £200 on average off available income to service a loan or save a deposit
  • Funding for Lending Scheme and modest falls in house prices should help improve ability to buy for first-time-buyers even more in future

Fionnuala Earley, RBS Group UK Consumer Economist says:

"At last some good news for first-time buyers – ability to buy has improved to its best level since 2009, after deteriorating in eight out of the last 12 quarters.

"Changes to tax and National Insurance has put £430 more cash per year in the average first-time buyer’s pockets. This, along with lower average house prices, made it easier to afford to get on the housing ladder in most of the UK. But the rising cost of essentials continue to eat away at after tax income, and reduced the increase in income available to service a loan or save for a deposit to just £240."

"While average ability to buy improved by 3% compared to last year, it deteriorated by 1% in London. But, there is still some good news for first-time buyers in the Capital. The extra cash available at the end of the month means it should now take London first-time buyers four months less to save a deposit than in Q1 2012. Scotland saw the biggest improvement in the last 12 months, better conditions mean it is now 15% more affordable for first-time buyers to get onto the property ladder."

"Looking ahead, there is more good news. The Funding for Lending Scheme has already helped reduce first-time buyers borrowing costs. Together with modest falls in house prices this should help improve the outlook for first-time buyers further."

Ability to Buy

Q2, 2012 was the easiest time for first-time buyers to get on the housing ladder for three years.

(A move down in the Index shows improving. HPE = House price to earnings ratio.)

Ability to buy (A2B) for FTBs improved by 3% y/y in Q2 2012. This improvement was mainly due to the budget changes in tax and National Insurance (NI).

The increase in income changes in the tax and NI thresholds added £430 to first-time buyers’ average post tax earnings. But the rising cost of essentials wiped almost £200 off this, leaving an extra of £240 per year to help service a loan or save a deposit. Falling house prices in most parts of the UK also helped ability to buy improve in Q2.

More simplistic measures of affordability do not reflect the effect of changes in taxation, or the cost of living. But ignoring these gives only half the picture of the true ability to buy and how the pressures on first-time buyers change.

Regional Ability to Buy

Average ability to buy disguises huge differences across the UK. Over the year A2B improved most in Scotland where it was 15% better than the same time last year. The North East saw a 9% improvement in the same period. But A2B deteriorated by 1% in London and the West Midlands because rising house prices outweighed the other effects. The East Midlands saw the biggest deterioration (12%) but volatility in the data suggests that this should be treated with caution


The rising cost of essentials wiped out almost half of the benefits of lower income tax and NI

The rate of inflation is now falling but the cost of essentials is still rising faster than earnings. This eats into the income available to service a loan or save a deposit. Food, transport and utility costs increased by 3.3%, 1.4% and 6.1% respectively in Q2 2012. Earnings increased by only 1.6%. Lower house prices have helped improve A2B and further modest falls expected this year should improve the outlook too.

Gross earnings for the average first-time-buyer household increased to £24,592 in Q2 2012 a £387 (1.6%y/y) increase on Q2 2011. Annual income after tax and national insurance, increased by £430 (2.3%y/y) because of higher income tax allowances introduced in the 2012 Budget. But after taking account of spending on essentials, discretionary income rose by just £240 (2%y/y) to £12,444.

London and the South East spend around 10% more on essentials than the UK average, which contributed to these regions having the smallest increase in discretionary income in Q2 2012. First-time buyers in the North East and Yorkshire and Humberside spend about 14% less than the UK average on essentials, helping them to benefit from a slightly higher than average increase in discretionary income.

Mortgage affordability

Falling house prices and the Funding for Lending Scheme should help ability to buy in future

The price of an average first-time buyer house fell by 1.6%y/y in Q2 2012. As a result mortgage payments faced by an average first-time-buyer household buying in Q2 2012 was £17 less per month compared with Q2 2011. This took up 55% of discretionary income compared with 58% at the same time last year.

The first-time-buyer mortgage burden differs substantially across the UK. In Q2 2012 mortgage payments took up almost 72% of a London first-time-buyer’s income after tax, NI and spending on essentials. This is the highest proportion in the UK. In contrast, mortgage payments take up just 44% of a Scottish first-time-buyer’s discretionary income.

House prices are expected to fall modestly this year which will help A2B. But the Funding for Lending Scheme, which began in August and will continue for two years, should also help. It has already led to some reduced borrowing costs and if more lenders take advantage of the scheme A2B could improve more in future.

How long to save for a deposit?

It will still take the average UK first-time-buyer household about three years to save a deposit

House prices are falling now, but we expect them to begin to increase again within the next three years. Taking the expected future rise in prices and earnings over the next few years, an average UK first-time buyer household would still have to save for 37 months to raise a 10% deposit. Those in London would have to save for 47 months, but Scottish first-time buyers would have to save for just 30 months.

Regional tables



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