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Home Affordability Improves
Written by on 14 August, 2009Plummeting house prices combined with a reduction in Bank of England base rates to just 0.5% has led to an improvement on home affordability in all boroughs in the United Kingdom since the third quarter of 2007, according to a new report.
Halifax recently launched a review to track the affordability of housing in 407 boroughs, including all 32 London boroughs.
The affordability calculation is based on the difficulty a home buyer faces with respect to the average house price, rate of interest and average earnings of citizens of that local authority. The higher the rate of interest relative to disposable income, the more difficult it is for a first-time buyer to enter the market. Calculations are based on a single income so the figures are regarded as fairly conservative.
The median house price decline was 16% during 2008 and it is widely anticipated that this pattern will continue over the course of 2009. Halifax advises first-time buyers to factor in these likely falls when performing any affordability calculations. Any further falls in house prices can only serve to improve the affordability situation further.
The percentage of disposable income used to make monthly mortgage repayments has fallen sharply during the last 18 months. In the third quarter of 2007, homeowners were committed to spending 48% of their disposable earnings on mortgage repayments. However, in the first quarter of 2009, this figure had reduced to just 31% of disposable income. Over the course of the last 25 years, the average figure has been 37%.
Home affordability has improved in all 12 UK regions since the middle of 2007, although the fall has been more marked in some areas than others. In Northern Ireland, the figure has fallen from 63% to just 37%. Also, London has seen a fall from 56% to 34% which is also below the long term average.
A total of 217 of the 407 local authorities surveyed have seen a reduction in mortgage rates relative to disposable income of upwards of 25%. A total of six local authorities have seen a fall of greater than 40%.
Home affordability was poorest in North Cornwall (63%), South Buckinghamshire (62%), Guildford (58%), Christchurch (57%), East Devon (53%), North Devon (51%) and Cambridge (51%). Not surprisingly, the most expensive places to live were in the commuter belts and where there was a higher percentage of second homeowners.
The most affordable local authority was Copeland in Cumbria where the figure was just 22%. This was closely followed by the Shetland Islands (23%), Renfrewshire (23%), West Dunbartonshire (24%), North Ayrshire (25%), North Lincolnshire (25%), South Ayrshire (25%) and Doncaster (25%). This is a new assessment and updates will be issued on a quarterly basis.
Despite these changes in home affordability, first-time buyers are recommended to tread with caution due to rising unemployment, the dislocation of the financial markets and low consumer confidence with regard to the entire housing market. It is believed that these factors will continue to exert downward pressure on house prices over the remainder of 2009. Home buyers will continue to face the very real threat of negative equity.
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