In the first instalment of this short Nethouseprices series, we looked at Nationwide's recently published house price index for December. To recap, the mortgage lender found that the average cost of a home rose by 0.6 per cent to £211,156 in the final month of 2017. On an annualised basis, house prices in the UK increased by 2.6 per cent, down from the 4.5 per cent recorded at the same stage of 2016. The index, however, contained some hugely interesting additional data around regional variations in housing affordability and the length of time it typically takes for a first time buyer (FTB) to save for a deposit in different parts of the country. In Part Two, we examine these aspects of the Nationwide index.
One of the key trends in the UK housing market last year was, at least on the face of it, the progressive narrowing of the North - South property prices divide. Consider, for example, the Nationwide finding that the average cost of a home in the West Midlands grew by a very healthy 5.2 per cent in 2017, while London - traditionally the engine room of this country's residential property sector - saw its house prices fall by 0.5 per cent. In a sense, though, the fact that growth in London and the South East of England is being eclipsed by virtually every other region is something of a red herring, as the cost of a home remains dramatically higher in the southern portions of Britain, bringing genuine affordability difficulties for FTBs.
Income and affordability
To illustrate this point, Nationwide used regional income data to determine where in the spectrum of income distribution a potential FTB would need to lie in order to purchase an entry level home in each region. The lender assumed that the FTB would need a 20 per cent deposit and was borrowing 4 times income. It found that:
- To buy a house in the North East or Scotland, the FTB's income would need to lie in the 30th percentile.
- To buy a house in Yorkshire and Humberside, the North West of England, Wales and Northern Ireland, the FTB's income would need to lie in the 40th percentile.
- To buy a house in East Anglia, the East Midlands and the West Midlands, the FTB's income would need to lie in the 60th percentile.
- To buy a house in the South West of England, the FTB's income would need to lie in the 75th percentile.
- To buy a house in the South East of England, the FTB's income would need to lie in the 80th percentile.
- To buy a house in London, the FTB's income would need to lie in the 90th percentile.
These figures demonstrate graphically the scale of the challenge facing aspiring homeowners in many regions of the UK and adds an exclamation mark to the assertion made by many commentators that affordability constraints are weighing down house price growth in London and the South East. Put simply, those on low to middle incomes are effectively being priced out of these markets.
Has it always been like this? Not quite. The following were, according to Nationwide, the regional income requirements back in 2007:
- To buy a house in the North East and Scotland, the FTB's income would have needed to lie in the 50th percentile.
- To buy a house in Wales, the North West of England, Yorkshire and Humberside, East Anglia, the East Midlands and the West Midlands, the FTB's income would have needed to lie in the 60th per percentile.
- To buy a house in the South East and South West of England, the FTB's income would have needed to lie in the 75th percentile.
- To buy a house in London, the FTB's income would have needed to lie in the 80th percentile.
- To buy a house in Northern Ireland, the FTB's income would have needed to lie in the 90th percentile.
As well as underscoring the degree to which income requirements have changed in the past decade, these statistics make an important wider point about house prices in the UK - that several regional markets - notably Scotland, Northern Ireland and the North East of England - have yet to recover ground lost during the financial crisis.
Saving for a deposit
There is nothing new in the statement that FTBs struggle to save for a deposit, of course. Low savings interest rates, sluggish wage growth and rapidly rising property prices all represent obstacles to accumulating an adequate deposit. Regulations around the size of deposit required have also become much more stringent in recent years. Accordingly, Nationwide finds that, in most regions, it will take potential homeowners upwards of eight years to save for a deposit. This rises to a worrying ten years in London.
The study is, in many ways, rather dispiriting for those who are anxious to take the first step on the property ladder. But there are some compelling reasons to believe that the situation might improve - at least to some extent - in the coming few years:
- Firstly, the government has reiterated its commitment to supporting homeownership and, as recently as last November, dedicated a fresh £10 billion of public money to its help-to-buy programme.
- For reasons discussed at length elsewhere on Nethouseprices, buy-to-let has become a less attractive option for many investors, meaning that FTBs face less competition for affordable housing.
- While the government's ambition of building 300,000 new homes per year seems a distant prospect, there has been a marked uptick in new builds during the past year or so. An increase in the supply of housing will help to contain price growth, which in turn will help FTBs.
- In truth, the jury is still out in the degree to which the abolition of Stamp Duty for FTBs will help its intended beneficiaries, with some analysts believing it will stimulate prices and others contending that it will only make an appreciable difference in London and the South East where inflated house prices currently attract high levels of Stamp Duty. Some commentators are much less sceptical, however. In any event, the policy does indicate the government's determination to boost homeownership among young people.
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