Special report on nationwide affordability: higher interest rates likely to have a moderating influence on the housing market


High house prices relative to average incomes continue to make increasing a deposit a significant hurdle for first-time buyers (FTBs).

With a 20% deposit equaling 110% of average income, this is a record, down from 102% just a year ago.

House prices have grown faster than profits over the past year, leading to an increase in the cost of servicing a mortgage relative to take-home pay, leaving the Northern regions and Scotland the more affordable.

Growth in house prices has outpaced profit growth over the past year and the house price-to-middle-income ratio (HPER) has hit an all-time high.

In the third quarter of this year, the UK house price-to-first-time buyer (FTB) earnings ratio stood at 5.5, above the previous record of 5.4 in 2007, and well above above the long-term average of 3.8, commented Andrew Harvey, Senior Economist. .

Harvey continued, while there is still a significant gap between the least affordable and the most affordable parts of the UK, it has remained broadly stable over the past year.

London continues to have the highest house price-to-earnings ratio at 9.0, although it remains below its all-time high of 10.2 in 2016.

Scotland continues to have the lowest house price-to-earnings ratio in the country at 3.4, followed closely by the Northern region at 3.5.

Over the longer term, northern England and Scotland have historically recorded lower HPERs than southern England, Wales and Northern Ireland.

One of the consequences of high real estate prices relative to income is that it makes filing a deposit a significant challenge for potential first-time buyers.

Indeed, right now, a 20% down payment now equates to 110% of a typical full-time employee’s pre-tax income, a record high and up from 102% a year ago.

Nevertheless, there are substantial regional variations.

A significant proportion of first-time buyers rely on help from friends and family or an inheritance to help them put together a down payment.

In 2019/20, around a third of first-time home buyers received help setting up a down payment, either in the form of a gift or loan from family or friend, or by inheritance, against 27% 25 years ago.

Affordability is becoming increasingly strained in all regions despite low mortgage rates

House prices have continued to rise faster than profits in recent quarters, which means affordability is increasingly strained.

Due to historically low interest rates, the comparative cost of servicing a typical mortgage loan is still well below pre-financial crisis levels.

However, even on this measure, affordability becomes more difficult.

First-time homebuyers’ mortgage payments (based on a mortgage at 80% of the value of the loan, at going mortgage rates) are currently slightly above the long-term average, at 31% of take-home pay.

The cost of servicing a typical mortgage as a percentage of take-home pay is now above its long-term average in most parts of the UK. However, before the pandemic, this was only the case in one region (London).

Recent price trends suggest that an element of rebalancing is occurring where most of the regions that have experienced the strongest price growth are those in which affordability is still near or below the long-term average.

What impact could rate hikes have?

There has been growing speculation that the Bank of England’s Monetary Policy Committee (MPC) will raise interest rates in the coming months.

Obviously, a lot will depend on the Committee’s assessment of the outlook for growth and inflation, but investors expect the bank rate to be raised from its current record low of 0.1%. towards the end of the year – most likely 0.25% or 0.5% – and possibly reaching 1% in 12 months.

Provided the economy does not weaken significantly, the impact of a limited hike in interest rates for existing borrowers is likely to be modest, especially since only 20% of outstanding mortgages are at interest rates. variables.

The vast majority of new mortgages in recent years have been extended to fixed rate, with five-year fixed rate agreements becoming increasingly popular, accounting for almost half of new mortgages.

Despite the sharp rise in swap rates in recent months, mortgage rates have remained close to their historic lows.

But that might not persist, and if new mortgage rates were to rise, it would put additional pressure on affordability for potential first-time buyers.

We modeled the impact of mortgage rate increases on the initial mortgage payments of the first buyer, assuming an 80% mortgage over 25 years.

A 0.4% rate hike would increase initial mortgage payments by £ 34 per month.

This represents a modest increase in mortgage payments over take-home pay from the current level of 31% to 32%.

A rate hike of 0.9% would increase initial mortgage payments by £ 79 per month (from current levels), which is 34% of take-home pay.

If the economic recovery remains resilient, rising interest rates should exert a moderating influence on the housing market, as well as ease price pressures across the economy.

Barrows and Forrester Managing Director James Forrester said:

“Much has been said about the government’s success in negotiating the pandemic with regard to the real estate market. While it’s fair to say that the market has never looked stronger, this statement is largely based on perspective.

If you own a home and have experienced a double-digit increase in value over the past year, you are definitely over the moon.

However, those struggling to muster a sufficient deposit are unlikely to share this view.

The cold reality is that if you aren’t looking to buy with the financial backing of a second salary, the backing of the Mom and Dad Bank, or if you aren’t earning much more than the average person in your area, the The dream of home ownership is one that you probably won’t realize until much later in life than you would like.

Benham and Reeves director Marc von Grundherr commented:

“We have seen a respectable level of wage growth in recent years, but unfortunately this has not been enough to match the strength of the UK housing market.

At the same time, record interest rates over such an extended period have been great for those taking their first step on the real estate ladder with a mortgage, but they have been terrible for those trying to save.

Even in London, where house price growth has been fairly subdued compared to much of the UK and wages are more robust, the barrier to homeownership is still incredibly high.

Sadly, there isn’t much that can be done, although the cyclical nature of the real estate market suggests that what goes up, will come down.

So sitting around and waiting for a correction is probably the best immediate bet open to troubled homebuyers. “


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