Inflation stops first-time buyers getting a foothold

Tuesday 31st January 2012

Although mortgage payments have fallen to their lowest since 2003, inflation has made it harder for first-time buyers to get a foot on the housing ladder than during the 2009 recession.

The new Ability to Buy Index from RBS says that although first-time buyer house prices fell last year, by 0.5% in the first three quarters of 2011, spending on food, transport and utilities increased by 7%.

The report says the ability of first-time buyers to get on the housing ladder is worst in the East of England, East Midlands and London.  

Fionnuala Earley, RBS economist, said: “Our new index provides the most accurate picture available today of the squeeze on first-time buyers, by including the effects of tax, National Insurance, earnings and rising living costs in addition to house prices and interest rates.
 
“Our first results show that higher living costs are making it more challenging for first-time buyers to enter the market, despite the lowest mortgage payments in almost a decade.”

She went on: “Traditional affordability measures only look at gross earnings, but the RBS Ability to Buy Index gives a more realistic approach by taking into account other essential calls on buyers’ incomes. It is particularly timely given the FSA’s emphasis on the assessment of borrowers’ outgoings in its latest proposals on mortgage regulation.

“But it’s also important at a time when inflation is putting such pressure on household budgets.
 
“It is a little surprising that even though house prices are falling and incomes have increased, FTBs are squeezed more now than they were during the 2009 recession.

“The rising cost of essential goods and services has eroded their discretionary income. But low interest rates are still a tremendous help. A 90% loan for a first-time buyer would take up just 52% of available income today compared with 84% at the market peak. This gives borrowers a much bigger financial cushion. But lower discretionary income and low interest rates mean saving for a deposit is still a hurdle.”

Meanwhile, Nationwide is set to launch an advertising campaign tomorrow on TV and in newspapers under the heading ‘We do more for first-time buyers’.