04 June 2008New research reveals 28.3% of young working households priced out of housing market - up to two in five priced out in worst affected regions
A new study into the national profile of housing affordability compiled for Hometrack, the housing intelligence business and published tomorrow (4 June), reveals that over a quarter (28.3%), of young working households in Britain are unable to access the very lowest rungs of the property ladder in their local market. The largest proportions of young working households unable to access the housing market are in London (41%) and the South West (40%).
Rising mortgage rates before and after the credit crunch along with strong house price growth have further increased affordability pressures on first time buyers. The survey shows that the average mortgage costs for a first time buyer have risen by 12% over 2007 with the mortgage cost to earnings ratio for a first time buyer now exceeding the previous peak in 1990 (34.5% of earnings in 2007 compared to 34.1% in 1990).
However, housing affordability is not all about the cost of owner occupation and the report examines the cost of renting versus buying. The analysis highlights how the cost of renting is substantially lower than the costs of buying a home across nearly the whole country - nationally the cost of renting is just 68% of the cost of buying a typical 2/3 bed home. The report examines the importance of the private rented sector in delivering housing for those who are unable to access owner occupation and highlights how the rented sector has been boosted by buy to let investors who have largely helped increase the size of the rented market to almost 3 million dwellings.
The report, Can't Supply: Can't Buy - the affordability of private housing in Great Britain has been written by Professor Steve Wilcox of the University of York, using Hometrack house price and rental data. This is the second year that Hometrack has commissioned the report and the findings present a comprehensive and detailed analysis of the state of housing affordability across every local authority in Great Britain. It builds on earlier analysis conducted for the Joseph Rowntree Foundation between 2002 and 2005 (see notes to editors). The data in this latest report refers to 2007.
The report looks at a number of affordability measures namely:
- Local house price to income ratios
- The size of the Intermediate Housing Market (IHM) - the proportion of young working households who are unable to access the owner occupied market in their local area
- The affordability of private rented housing
The detailed analysis in the report is based on the average price of a 2/3 bedroom home and the average income of young working households aged 20 - 39 years.
In terms of house price to household income ratios the analysis shows the highest ratio is in London (6.11:1) closely followed by the South West (5.38:1) and the South East (4.89:1). At a local level, the analysis reveals that there are forty-two areas with a house price to income ratio in excess of 6:1. The least affordable authority is identified as Kensington & Chelsea, with a house price to household income ratio of 12.04:1. In addition a further nine London authorities have ratios in excess of 6:1. Nineteen of the least affordable areas are located in the South West with house price to income ratios ranging from 6.13:1 in West Dorset to Penwith (8.37:1). At the other end of the spectrum in 2007 there were just ten areas where house price to income ratios fell below 3.00:1.
The increase in affordability pressures over recent years has priced a growing number of young working households out of the market and the report quantifies the size of the so called Intermediate Housing Market (IHM). The ?narrow' definition of the IHM covers the proportion of young working households who are on incomes too high to claim housing benefit but too low to access the lowest level of the property market in their local area. The analysis shows that, nationally, over a quarter (28.3%) of young working households are unable to purchase property at the lowest level in their local housing market.
The least affordable region is London where 41.0% of younger working households fall into the narrow IHM, closely followed by the South West (40.1%) and then the South East (35.8%). The North East is the most affordable area with 16.9% of young working households priced out of the market. In the very worst affected areas of the country, more than 41% of young working households are priced out of their local market - Weymouth & Portland (57.1%) and Carwick (56.09%) in the South West and Brighton & Hove (51.7%) in the South East.
While a substantial number of young working households are unable to buy locally, they are however able to rent. The report looked at renting versus buying and found that in all regions, the costs of private rents are significantly lower than the costs of house purchases. Across the country as a whole, private rents for 2/3 bedroom properties were only just over two thirds (68.2%) of mortgage costs for a similar sized property.
Commenting on the report, Steve Wilcox said, "While house prices are falling, access to the property market is being increasingly limited by the costs and more restrictive terms of a substantially reduced supply of mortgage finance. Without further measures to restore the availability and accessibility of mortgage finance there is the risk of a severe downturn, with all the harmful consequences that this entails. Alongside other measures there is a strong case for government to promote the selective use of mortgage guarantees. These would assist key workers, first time buyers and existing households in financial difficulties as a result of being unable to refinance to escape unfavourable mortgage deals."
Commenting on the outlook for affordability Richard Donnell, Hometrack's Director of Research says, "While mortgage rates for first time buyers have risen to over 6%, the changes in the availability and terms of mortgages has had the greatest impact. The reduction in maximum loan to value ratios to 90% has increased the cost of getting on the housing ladder by an average of £10,000. At the same time a major decline in the volume of homes for sale and falling levels of new supply are likely to support over-stretched affordability levels in the near future. Until such time as mortgage rates start to fall then lower house prices will be the only real driver of improved affordability for first time buyers. Twenty percent of those currently priced out of the market would be priced back in by a 10% fall in house prices [taking the proportion of households in the IHM from 28.3% to 22.5%]."
"The extra cost and general market uncertainty is driving would-be purchasers into the rental market where renting is currently cheaper than buying - this was not an option in the late 1980s as the rented sector did not exist in its current form. However rental affordability is likely to worsen in the coming months on the back of rising rents which are up by as much as 20% in some markets over the last year."