Money News
FTBs (First-time buyers) are often heralded as the main driver of the housing market, injecting brand new demand and adding liquidity to help to support house prices. Whilst the proportion of FTBs in the market has been falling over time they still account for almost 40% of all house purchase transactions in the UK, according to new research from the Nationwide Building Society.
The answer to this puzzle, says the Nationwide, lies in the types of homebuyer that fall into the FTB category. Indeed, it includes a significant proportion of buyers returning to the market, perhaps after a spell in rented accommodation or moving from dissolving households.
These buyers differ from the stereotypical picture of a FTB as they tend to be older and thus on higher incomes. More importantly however, such buyers often have access to deposits funded from past increases in house prices which ease them back into the market. In 2005 'returners' may have accounted for up to 20% of all FTBs.
Meanwhile, mortgage payments for a FTB on average earnings would now account for around 42% of take home pay compared with only around 18% in 1996. However this is still relatively modest compared to the height of the late 80s house price boom when the ratio was more than 55%. House prices have increased by more than 200% since 1996, whereas earnings have increased by less than 50%.
The affordability of servicing the debt has of course been helped by lower interest rates over this period. In 1997 base rates averaged 7.25% compared with 4.5% now. This has helped to subdue growth in the first-time buyer affordability index in spite of the increase in prices.
However, since around 2002 a gap has been widening between actual earnings and the earnings required to overcome income multiple constraints. This is in spite of a significant, if gradual increase in income multiples over the last five years. In 2001 the average income multiple for FTBs was 2.4x compared to 3.1x now. But as house price inflation has outpaced earnings growth more borrowers have been excluded.
Meanwhile, the average age of FTBs has changed over time. It is now 29, but the distribution of earnings shows that only the top 5-10% of the 22-29 age group in the UK earn enough to be able to meet the income multiple criteria and buy with only a 10% deposit. This is much lower than the 20% in 2000 earning at this level. Even older first time buyers are finding it more difficult. Only the top 20% of the 30-39 year old age group earn enough now compared with the top 40% in 2000.
20 June 2006 © Moneyextra.com
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