by Mark Johnston
Even with the recent losses in house value and low interest rates, first time buyers are still being priced out of the market. Historically, mortgage affordability was based on four times a borrowers salary. Taking into account the average UK salary and the average UK house price even after recent losses. The average house is still around five times the average persons salary in the UK.
Taking this into account, first time buyers have little chance of getting onto the inflated Uk hosuing market especially given that the FSA are due to publish even stricter lending rules following their mortgage market review.
Nationwide’s economist Martin Gahbauer recently pointed out that: “Although the house price to earnings ratio is currently above its long-run average, it is possible that the equilibrium level of the house price to earnings ratio is higher than the long-run average level would suggest. Factors that could argue in favour of a higher equilibrium level are a much lower level of real interest rates than in the past, and a higher proportion of households with more than one earner. If one assumes that the long-run average is the equilibrium and that the ratio will eventually revert to its mean, this would imply house prices rising by less than average earnings over a period of time. It does not mean that house prices need to fall abruptly.”
Another spokesperson on the subject, Melanie Bien from broking firm Private Finance said: “Historically low interest rates are proving to be a real blessing for homeowners. Many are enjoying extremely cheap mortgage rates which mean that higher living costs and the reduction in income faced by some homeowners are not as disastrous as they would otherwise be. Most forecasters agree that interest rates will not rise until next summer at the earliest, and then at a slow rate. However, borrowers should not be complacent but consider how they will afford their mortgage once rates start to rise. Taking out a fixed rate now for five years, rather than sitting on your lender’s standard variable rate, might be a sensible option if you are worried about losing your job or budgeting.
She went on to say: “House prices may have fallen again in November but this seems to be more of a gradual slowdown than a crash. There is still plenty of pent-up demand from buyers keen to purchase a home but who can’t get a mortgage. They are being forced to rent for longer so while first-time buyers may be struggling to get on the housing ladder, landlords who can access the finance will find there are plenty of opportunities for them, with the prospect of rising rents and yields. The number of repossessions is at modest levels but they could rise once government spending cuts filter through and more jobs are lost. It is important that lenders are understanding and continue to show forbearance, while the government ensures that there is help for those who are struggling. Tough times are ahead – make no mistake.”
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