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Rising living costs are hampering first time buyers in the UK, research shows

A new Ability to Buy Index from the Royal Bank of Scotland paints a mixed picture for first time buyers in Britain. While average mortgage payments have fallen to 2003 levels, it is now more difficult for first time buyers to get a foot on the housing ladder than during the 2009 recession.
‘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,’ said Fionnuala Earley, RBS Group UK consumer economist.

‘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 as 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,’ she added.

The index shows that it is harder to buy now than in the 2009 recession. This contrasts with house price to earnings measures which suggest conditions have improved. But the rising cost of essentials during 2011 has outweighed the effect of falling house prices and rising incomes on the ability to buy.

Ability to buy has deteriorated most in the East of England, East Midlands and London since 2009. The biggest improvements were in Northern Ireland and the North East.

In the third quarter of 2011 a first time buyer repayment mortgage took up just 52% of discretionary income, that is 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%.
But 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%.

Low interest rates and squeezed discretionary income also mean that it will take a long time to save for a deposit, but not as long as in 2007.

Assuming that house prices stay still, earnings grow at a modest annual rate of 2.5% and first time buyers can save 30% of discretionary income, it would take three years to save a 10% deposit. In London it would take eleven months longer, but in the in the North East it would take just 29 months to save a 10% deposit.
It also shows that while house price to income ratios have improved, ability to buy is worse than 2009. It says that high inflation is the cause of the recent deterioration in ability to buy, but before the housing market peak, low inflation was an important factor in its improvement. In the decade to 2007 lower living costs meant first time buyer discretionary income rose from 50% of gross income to 55%. This, along with lower interest rates, made it easier for households to afford to take on and service debt and was a contributing factor to rising house prices up to 2007. But since 2009, general inflation has been increasing and the price of essential goods and services has been increasing more quickly. This has eroded firs time buyer discretionary income to 53% gross income.
It also says that the actual cost of living is crucial when first time buyers make calculations about what they can afford, especially in an uncertain economic environment. The squeeze on their discretionary income is likely to be another factor hindering demand.

Inflation is now beginning to fall and will do so faster when last year’s VAT rise falls out of the calculations. This will help to improve the ability to buy, assuming earnings still rise. But, if the cost of food transport and utilities continue to rise quickly, buyers will continue to feel the squeeze for longer, even if house prices continue to fall, the report points out.