High house prices relative to earnings creating barrier for first-time buyers

Jake Carter

January 18, 2021

High house prices relative to average earnings continue to make raising a deposit a significant barrier for first-time buyers, according to Nationwide.

At the end of 2020, the UK first-time buyer house price to earnings ratio stood at 5.2, close to 2007’s record high of 5.4, and well above the long run average of 3.7.

London has been the least affordable region for most of the past 40 years – the house price to earnings ratio in the capital reached a record high in 2016 of 10.2 and remained elevated at 9.2 at the end of 2020.

Meanwhile, Scotland currently has the lowest house price to earnings ratio at 3.2, closely followed by the North at 3.3.

Looking over the longer term, Northern England and Scotland have historically seen lower house price to earnings ratios than Southern England, Wales and Northern Ireland.

A 20% deposit is currently equivalent to 104% of the pre-tax income of a typical full-time employee, up from 87% ten years ago, although there is significant regional variation.

In 2018/19, around 40% of first-time buyers had some help raising a deposit, either in the form of a gift or loan from family or a friend or through inheritance.

This is up from around a quarter in the mid-1990s.

First-time buyer mortgage payments, based on an 80% LTV mortgage, at prevailing mortgage rates, are currently slightly below the long run average, at 28% of take-home, net pay.

In 2020, around 70% of first-time buyers took out a mortgage with an initial term of over 25 years, up from 45% in 2010.

Andrew Harvey, senior economist at Nationwide, said: “We’ve developed a range of new affordability metrics as part of our new, annual HPI Affordability Report. These indicators consider affordability across a range of different attributes.

“Over the past few years, earnings growth has broadly kept pace with house price growth, which means that the ratio of house prices to average earnings (HPER) has remained relatively stable, albeit at a high level.

“We’ve also looked at how affordability varies for people in different professions looking to buy their first property.

“Perhaps unsurprisingly, mortgage payments relative to take home pay are lowest for those in managerial and professional roles, where average earnings tend to be higher.

“The differences in affordability reflect the divergence in earnings by occupational group.

“For example, those working in professional occupations typically take home around 75% more per year than those working in sales and customer service.”

Marc von Grundherr, managing director of Benham and Reeves, added: “While London is home to the highest average earnings in the UK, the high cost of climbing the ladder in the capital means homebuyers continue to face the toughest task of all UK regions.

“Both where an initial deposit is concerned and the ongoing commitment of mortgage payments.

“For those with the grit and determination to climb the London property ladder, the reward can be well worth it.

“London remains one of the most desirable cities in the world from a bricks and mortar point of view and we’ve seen the capital weather multiple storms over the years, not only living to tell the tale but returning to normality at a far quicker pace than the rest of the UK.”

Sign up to our daily email