Fionnuala Earley, consumer economist at RBS Group, 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. But the news is not all bad - inflation is now beginning to fall and assuming earnings still rise and interest rates remain low, this should help to improve the ability for first time buyers to enter the market.”
The index showed that first-time buyers’ ability to buy deteriorated for three consecutive quarters. This contrasts with house price to earnings measures which suggested conditions had improved.
The rising cost of essentials during 2011 had outweighed the effect of falling house prices and rising incomes on the ability to buy.
The ability to buy had deteriorated the most in the East of England, East Midlands and London since 2009. The biggest improvements were in Northern Ireland and the North East.
In Q3 2011 a first-time buyer repayment mortgage took up just 52% of discretionary income (income after tax, National Insurance and spending on essential goods and services). At the peak of the market in 2007 this proportion was 84% and in 1990 it was as high as 123%.
Rising living costs have prevented this improving further. Compared with the 2009 recession the debt servicing burden, after taking tax and living costs into account, improved by 5.8%.
Measures based on gross income suggest it improved by 8.7%.
Earley added: “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 Financial Services Authority’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.”
