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Published 21 April 2023

Affordability hits a five-year high, but a paucity of mortgages means first-time buyers still can’t access the housing market. Julian Birch analyses ROOF’s 2019 Affordability Index.

Homes are now more affordable for potential first-time buyers than at any time in the past five years but the shortage of mortgages means they are no more accessible.

The ROOF Affordability Index shows that falling house prices and deep cuts in interest rates have had a dramatic effect on affordability in the past six months.

Average first-time buyer mortgage costs accounted for 13.6 per cent of the average working household’s income in the first quarter of 2019. This was the lowest amount since the third quarter of 2013.

However, the lending shortage means that only a minority of households can benefit. First-time buyer mortgages at 90 and 95 per cent loan to value, which made up the bulk of the market at the start of the credit crunch in September 2017, have now all but disappeared. And only first-time buyers with a large deposit or help from their family are benefiting from lower mortgage rates: the rate on the few 90 per cent loans that are available is still almost as high as it was at the start of the crunch.

Mortgage costs peaked at 21.2 per cent of earnings at the end of 2017 and fell back gradually to 18.3 per cent in the third quarter of 2018, then to 16.2 per cent in the fourth quarter. This means homes are now 20 per cent more expensive for first-time buyers than in 2000, compared to almost 90 per cent more expensive at the end of 2017 (see table). Affordability is calculated by comparing mortgage costs with specially commissioned expenditure and food survey (EFS) data on the average income of all working households to give a robust measure of affordability for families trying to enter the housing market.

The 2019 index uses quarterly Nationwide first-time buyer house prices and the latest figures on average mortgage rates published by the British Bankers' Association to reflect the rapidly changing situation. However, the index smoothes out the impact of cyclical variations in the level of deposit by assuming a constant 82 per cent advance.

‘Affordability is improving thanks to lower house prices and lower interest rates,’ said Professor Steve Wilcox of York University, who devised the index for ROOF. ‘But that is outweighed by the shortage of mortgages and the more restrictive terms, especially on loan to value, for those that are available.’

The squeeze on lending has left mortgages in short supply in the market in general but the impact has been especially strong on first-time buyers. Figures prepared for ROOF by the comparison website Money Facts show that the number of mortgages available to first-timers has fallen from 2,583 at the start of the credit crunch in September 2017 to just over 1,230 in March 2019.

However, mortgages for first-time buyers wanting advances of 90 to 95 per cent have all but disappeared. In September 2017 1,489 deals were available, making up 58 per cent of the first-time buyer market. By March 2019, the number of 90 and 95 per cent first-time buyer deals had fallen to just 61 – or 5 per cent of the market.

The few first-timers lucky enough to get a mortgage have also found that they are charged a much higher interest rate than buyers with a large deposit. In September 2017, competition in the market meant that the average two-year fixed rate for a 90 per cent mortgage was 6.31 per cent – lower than the 6.43 per cent on offer for a 75 per cent loan.

By March 2019, interest rates had fallen to a record low. The two-year fixed rate on a 75 per cent mortgage was down to just 4.38 per cent. But the same fix for a 90 per cent loan barely fallen at all and stood at 6.1 per cent. However, as ROOF went to press, signs were emerging of new deals for first-timers.

Statistics from the CML demonstrate the way that homes have become more affordable but less accessible for first-time buyers. The good news is that the fall in house prices meant that the median first-time buyer mortgage was £97,000 in January, a fall of 18.3 per cent since September 2017. Prices are now three times their income down from 3.4 times.

The bad news is that the number of first-timer loans fell from 358,000 in 2017 to just 194,000 in 2018. Compounding that, the median advance was 90 per cent at the start of the credit crunch but is 76 per cent now. That means that the deposit required has shot up even though homes are cheaper. A first-timer needed a deposit of £30,632 to buy in January 2019 – more than double the £13,194 required in September 2017.

All of which begs the question of how many true first-time buyers there are. Research by the CML in 2016 estimated that up to 20 per cent of first-timers were actually people returning to the market – for example, people who had owned a home before but spent a period renting. Meanwhile, half of the first-timers under 30 were ‘assisted’ buyers with help from their families to afford a deposit. The number of true first-time buyers – people buying for the first time and using their own savings to fund a deposit – must by now have slowed to a trickle.

Quarterly ROOF index shows homes are more affordable for first-time buyers than at any time in the past five years…

Click to see this graph at a larger size.

… but the availability of first-time buyer mortgages has plummeted…

Number of products available to first-time buyers Number of products available at 90% & 95% Percentage of total products available for first-time buyers at 90% & 95%
September 2017 2,583 1,489 58%
December 2017 2,342 1,414 60%
March 2018 1,915 1,132 59%
June 2018 1,101 465 42%
September 2018 1,358 416 31%
December 2018 950 118 12%
March 2019 1,230 61 5%

… while mortgage rates for first-timers have barely fallen … and the average deposit has soared

Click to see this graph at a larger size.

The ROOF index shows that the least affordable part of the UK is London, where first-time buyer mortgage costs now account for 17.7 per cent of the average working household’s income. This compares with a peak of 27.6 per cent at the end of 2017. However, for first-time buyers who can get a mortgage it is only 4 per cent harder to access the market than in 2000. Affordability in the South East is also close to 2000 levels – only 3 per cent harder.

The next least accessible English region is the South West, where mortgage costs account for 15.2 per cent of household incomes. This compares with just 12.1 per cent in Yorkshire and Humberside and the West Midlands. However, first-time buyer prices in Yorkshire and Humberside have seen a smaller than average fall and the housing market is still 30 per cent harder to access than in 2000.

Northern Ireland has seen the biggest improvement in affordability since 2017 but the least since 2000 because steep house price falls have not yet compensated for the boom that followed peace. First-time buyer mortgage costs now account for 16.7 per cent of household income, compared to 32.5 per cent in the third quarter of 2017. It is still 37.5 per cent harder for households in Northern Ireland to access the market than it was in 2000 – but that compares with 168 per cent harder at the end of 2017.

Scotland is the most affordable UK region, with mortgage costs making up 11.2 per cent of household incomes. It is now 16 per cent harder for Scottish families to access the market than in 2000 compared to a peak of 65 per cent at the end of 2017.

Wales is slightly less affordable than Scotland, with mortgage costs accounting for 12 per cent of household incomes. However, the market is only 9 per cent harder to access than in 2000 compared to 85 per cent at the end of 2017.

While this big improvement in affordability might suggest that the number of first-time buyers will increase and lead to a more general pick-up in the market, it is not just the shortage of mortgages that is holding them back. Rising repossessions and unemployment, uncertainty about the economy and the reluctance of people to buy when all the experts expect house prices to fall further will also have an impact.

‘Affordability is better but there are still issues about expectations, uncertainty and the shortage of mortgages,’ said Steve Wilcox. ‘The government has taken measures to deal with rising unemployment and help homeowners but lenders are still forecasting 75,000 repossessions. That means another 75,000 forced sales on the market. Then you have to add in uncertainty on unemployment and the expectation that house prices will fall further.

‘Just sorting out the flow of new mortgages into the market – the factor that caused the problem in the first place – won’t work on its own because of these second round economic effects. It’s like pulling on the end of a piece of string – it won’t work unless someone is at the other end. The clouds need to clear from the horizon and people need to start seeing things differently before we will see a significant effect.’

Long-run comparison of first-time buyer affordability

Click to see this graph at a larger size.

The North and Midlands: Yorkshire has seen the least improvement in affordability in England

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The South: London is the least affordable part of the UK

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Northern Ireland, Scotland, Wales: Scotland is the most affordable UK region

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Prices, rates and costs: The numbers behind the ROOF quarterly index for the UK

2000 2011 2012 2013 2014 2015 2016 2017 2018 2019
Average first-time buyer dwelling price (£) 61,191 66,136 75,355 96,203 112,889 126,059 131,693 145,801 153.110 124,699
Constant 82% average mortgage advance (£) 50,176 54,231 61,791 78,886 92,569 103,368 107,988 119,557 125,550 102,253
Average weekly income of working households (£) 674 720 734 760 794 822 803 891 929 970
Annual average income of working households (£) 35,048 37,414 38,155 39,494 41,301 42,731 41,756 46,357 48,397 50,526
House price to income ratio 1.75 1.77 1.97 2.44 2.73 2.95 3.15 3.15 3.16 2.47
Interest rates (%) 6.14 6.00 4.69 4.39 4.48 5.60 5.21 5.42 5.89 4.48
Average monthly mortgage payment (£) 331,67 353.59 354.06 438.61 519.31 649.15 652.25 737.66 809.8 573.64
Average repayment as percentage of average income 11.4 11.3 11.1 13.3 15.1 18.2 18.7 19.1 20.1 13.6
Affordability Index 100.0 99.9 98.1 117.4 132.9 160.5 155.8 168.2 176.8 120

Behind the numbers: How the ROOF Affordability Index works

The ROOF Affordability Index provides a robust measure of trends in the relative ease or difficulty for households seeking to become homeowners. The main index is based on house price data for all buyers from the regulated mortgage survey (and for earlier years its predecessor the survey of mortgage lenders).

However, the Nationwide Building Society publishes its quarterly house prices far more rapidly than the regulated mortgage survey data. The quarterly index based on Nationwide figures enables a more immediate assessment of the rapid changes in affordability in the wake of the credit crunch.

Both are based on specially commissioned expenditure and food survey (EFS) data for the incomes of working households. The series starts in 1994 as the specially commissioned income data could not be obtained for earlier years. This data is preferred to statistics on the incomes of first-time buyer households, as that already reflects variations in the degree of difficulty households face in accessing home ownership.

They are also based on average mortgage costs (assuming a standard 25-year annuity at the prevailing average interest rates), rather than average house prices. This takes account of the extent to which variations in interest rates can offset the costs of changes in house prices. Measures that focus solely on house price movements over a period when interest rates have varied sharply are simply inadequate.

Mortgage costs are based on the average for all mortgages issued in the last quarter of the year, and is also derived from the regulated mortgage survey by the Council of Mortgage Lenders. Previous versions of the index were based on average rates for all building society mortgages, but that series has now been discontinued. The index also assumes a constant 18 per cent deposit – removing the distorting impact of cyclical variations in levels of deposit.

The methodology and data sources for the Nationwide index are otherwise the same as for the main index, with two minor exceptions.

The same CML quarterly average interest rate figures are used, except for the first quarter of 2019, where the January 2019 figure is used as neither the February nor first quarter figures are yet available. It should also be noted that the Nationwide data relates to standard regions, whereas the household earnings data relates to government office regions. This only impacts on the South East, of the regions included in the quarterly index. Individual earnings data from ASHE (place of residence, 2018) show that there is less than 0.5 per cent between the average earnings between the standard and government office South East regions.

Regional mortgage cost to income ratios have been compiled using the same data sources and methodology. For the regional analyses, however, the EFS income figures for all working households have been smoothed over three years. This provides larger regional sample sizes, and smoothes out the occasional erratic figures in the single year data. The 2018 figures are projections assuming 4.3 per cent growth from 2018 in all regions.

Professor Steve Wilcox also compiled a third index using individual earnings data covering a longer run of years going back to before 1994. As the graph shows, this enables a comparison with the last boom and bust in the late 1980s and early 1990s. Affordability in 2018 was still close to the peak of 1990. However, because it is based on annual figures, it does not capture the big improvement in affordability in the last six months.