Worsening conditions for FTBs

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Conditions for first-time buyers have continued to worsen, according to research from RBS.

The ability to buy for first-time buyers deteriorated by 1% quarter-on-quarter and by 0.1% year-on-year in Q1 2012, as inflation rose and earnings stood still.

Despite the fact that first-time buyer house prices are falling, the rising cost of living outweighed the positive effect this had on affordability, RBS said.

The RBS Ability to Buy index assesses the full range of costs facing first-time buyers as they look to make the initial step onto the property ladder. It includes inflation, tax, National Insurance, essential living costs, average salaries and house prices themselves.

RBS said that traditional measures suggest that affordability improved for first-time buyers in Q1 2012 and now equates to levels last seen in 2003. But these measures do not include living costs in their calculations so gives only half the picture of the real ability to buy. Factoring in the expected changes in house prices and earnings over the next two years means that first-time buyer affordability is unlikely to return to 2003 levels until 2014.

The price of an average first-time buyer house fell by 1.2% year-on-year in Q1 2012 and is expected to fall by about 2.5% in 2012. This means that both mortgage payments and the size of deposit that first-time buyers have to raise will get smaller. Mortgage payments faced by an average first-time buyer household in Q1 2012 fell by £14 per month compared with Q1 2011. But in spite of this fall, the burden wasn’t any smaller. Payments still took up 55% of discretionary income.

Fionnuala Earley, UK consumer economist, said: “Sticky inflation is bad news for first-time buyers, but there is light at the end of the tunnel. The Monetary Policy Committee expects inflation to stay above its 2% target for longer than it previously thought. This will keep the pressure on all households, especially first-time buyers who have lower incomes. But things are getting better. We expect UK house prices to fall by about 2.5% in 2012, so even if the price of essentials continue to rise and earnings grow modestly in the same period, the ability to buy will improve.

“The impact of the worsening conditions has been felt most harshly by those wanting to buy in London. The index reveals that Londoners have to save nearly twice as long for a deposit as the rest of the UK, partly driven by the high cost of rents in the capital, where it accounts for around 75% of earnings after essentials compared to 50% for the rest of the UK.”

Over the year, the ability to buy improved most in Northern Ireland, where it was 15% better and the East of England saw an 11% improvement in the same period. The ability to buy deteriorated most in London, where it was 18% worse than in Q1 2011. It also deteriorated in the North East (-14%), Wales (-10%) and the South East (-5%).