The rise in the cost of servicing mortgages relative to take home pay is the greatest contributor to a lack of affordability for first-time buyers, according to Nationwide.
The bank’s affordability report states that between the start of the pandemic and the end of 2022, house prices increased by 19%, while incomes rose by just 9%.
A typical five-year fix rose from 1.3% in late 2021 to 2.9% by mid-2022, the report says, with a 20% deposit on a typical first-time buyer (FTB) home now equivalent to 112% of the pre-tax income of a typical full-time employee. This is marginally below the all-time high of 117% recorded in 2022.
Nationwide senior economist Andrew Harvey says: “Unfortunately raising a deposit remains a major hurdle for prospective buyers. In recent quarters, strong wage growth and a small fall in house prices (which fell c2.5% between August and December 2022) has led to a modest fall in the house price to earnings ratio (HPER). But this has done little to improve the situation, as it follows several years when house price growth outpaced earnings by a wide margin.”
All regions of the UK were shown to have experienced a deterioration in affordability compared to 2021, with the cost of servicing the typical mortgage as a share of take-home pay now at or above the long-run average in all regions.
London and the south of England saw affordability stretched the most, with mortgage servicing costs rising sharply compared with a year ago.
Scotland and the North continue to be the most affordable regions but the reports says that even there, mortgage payments as a share of take-home pay are at their highest level for over a decade.
There is some scope for affordability to improve a little in the year ahead, says Harvey.
“Longer-term interest rates, which underpin mortgage pricing, have fallen back towards the levels prevailing before the mini-Budget,” he says.
“If sustained, this should feed through to mortgage rates and improve the affordability position for potential buyers, albeit modestly, as will solid rates of income growth (wage growth is currently running at c.7% in the private sector), especially if combined with weak or negative house price growth.
“Nevertheless, the overall affordability situation looks set to remain challenging in the near term. Saving for a deposit will still be a struggle for many. The cost of living is set to outpace earnings growth by a significant margin again this year, while labour market conditions are widely expected to weaken (albeit from a robust starting position).”
