Housing affordability increases for first-time buyers

In the first quarter of 2009, the average price paid by an FTB was affordable for someone on average earnings in 21% of local authorities; compared to just 6% in 2007 Quarter three.

The house price to earnings ratio – a key affordability measure – is lower now than it has been for more than six years.

Further, the house price to average earnings ratio has declined from a peak of 5.84 in July 2007 to an estimated 4.34 in March 2009; a fall of 26%.

The proportion of disposable earnings devoted to mortgage payments – another affordability measure that includes the impact of interest rate changes – has also fallen significantly due to the combination of the decline in house prices and the cut in interest rates to record lows (from a peak of 48% in 2007 to 31% in 2009 Quarter one).

Martin Ellis, housing economist at Halifax, said: "There has been a marked improvement in housing affordability for potential first-time buyers in many parts of the UK over the past 18 months. This trend continued in the first three months of 2009.

"The significant reductions in house prices, relative to average earnings, has resulted largely from the decline in house prices since the autumn of 2007. As a result, housing is at its most affordable, on this key measure, for more than six years."

Mortgage payments, relative to earnings, are now below the long-term average of 37% recorded over the past 25 years and stand at 31%.

The number of first-time buyers is at a very low level despite the improvement in affordability. The latest industry-wide figures show that the number of FTBs in February 2009 was 46% lower than in February 2008.

The significant tightening in lending criteria, over the period since the summer of 2007, has been reflected in a much reduced availability in mortgages at high loan to value ratios. This development has prevented many potential FTBs entering the market notwithstanding the significant improvement in affordability.

Ellis said: "Conditions in the housing market are likely to be tough during the remainder of 2009 despite the improvements in affordability. Increasing unemployment, low consumer confidence and the constraining effects of the continuing dislocation of the financial markets on the availability of mortgage finance are all likely to exert downward pressure on the market over the coming months.

"House prices are expected to decline again in 2009. Prospective first-time buyers should factor the likelihood of further house price falls into their calculations when deciding whether or not to buy."

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