What’s Happening In The First Time Buyer Market?

This article was sponsored by our partners at Zoopla and written by Richard Donnell – Research and Insight Director at Zoopla.

First time buyers (FTBs) are an important buyer group; accounting for more than one in three sales. These buyers are a key driver of the growth in housing sales and we should therefore pay close attention to the pressures and influences on this group.

The absolute level of household income to buy a home impacts a potential pool of buyers and the demand for housing and therefore, house price growth. For these reasons, this month our Zoopla UK Cities House Price Index focussed on affordability for first time buyers.  

The findings revealed that the average income required for a first time buyer to purchase a home has grown by 9% since 2016 and stands at an average of £54,400 (See below chart). This is over £4,500 more than the amount needed three years ago. Below, I discuss these findings in more depth as well as what is driving these factors.  


Gross household income required for FTBs to purchase a home in UK Cities

Source: Zoopla Research


Affordability increases in London

London has a diverse mix of buyers, but first time buyers accounted for almost two in every five sales in 2018. First time buyers looking to buy their first home in the capital need an average income of £84,000, this is £3,250 less than the amount needed in 2016 which was a high point since the global financial crisis. Lower prices and a small decline in average mortgage rates has resulted in the average household income to buy a typical London home falling 4% in the last three years.

London’s housing market has seen the rate of price inflation slow rapidly over the last three years. More recently, average prices have been posting small annual falls across large parts of the capital as weaker demand results in a softening in prices.

Whilst affordability in London has improved, first time buyers here will need to earn more than three times the minimum income required to purchase in Liverpool, the UK’s most affordable city for first time buyers. Deposit levels remain over £100,000, making schemes such as Help to Buy London an attractive proposition for those with limited access to equity. For reference, Help to Buy London accounted for 5% of all London sales in 2018.

There are signs that the coverage of markets experiencing price falls is starting to slow but we expect prices in London to remain broadly flat in the near term as house prices continue to align to what buyers are prepared to and can afford to spend.


Average deposit required by a FTB to purchase a typical home

Source: Zoopla research


Affordability increases in the UK’s most expensive cities  

The income required for first time buyers to purchase in the three most expensive UK Cities has fallen by an average of -5% since 2016.

Cambridge and Oxford require the highest incomes of anywhere outside of London, however the income needed to purchase has fallen in the university cities by -5% and -3% respectively.

Aberdeen registered the largest percentage decrease in the minimum income required to buy of all the UK Cities, this is a result of sharp price decreases in the city following the crash in oil prices and is therefore an anomaly.

Average income to buy ranges from £26k to £84k

The average income to buy a typical property ranges from £26,137 in Liverpool to £84,000 in London – a spread of over £57,800 which highlights the different challenges facing first time buyers looking to purchase their first home.

Deposit levels have increased since the global financial crisis – the average first time buyer deposit ranges from £119,000 in London to £18,449 in Liverpool. Here, we assume a 15% deposit in regional cities and 25% in London, Oxford and Cambridge. The larger deposits for high value cities allow for the impact of loan to income limits. We assume the borrower can only take a mortgage that is up to 4x their income. In the highest value cities this means buyers must either buy a cheaper property or find a larger deposit.

The income to buy at a city level has grown fastest in markets where prices have been rising quickly. Leicester has seen the largest percentage increase in the income required to purchase since 2016, at 20%, followed closely by Birmingham and Manchester. Each of these cities have seen house price growth totalling 18% over the last three years.

Conclusion

Weakening city house price growth is a result of market fundamentals. Specifically, changing affordability dynamics for home buyers and the impact of successive tax changes since 2015. Together, these have impacted household buying power, and demand for housing, hitting high priced cities more than others.

First time buyers are an important group accounting for more than one in three sales. While the average household income to buy a typical home across UK cities has grown 9% since 2016, weaker price growth and recent price falls have led to a 5% reduction in the income to buy across the most expensive cities. It will come as a modest relief for would-be buyers although the income to purchase still remains relatively high. While it is a factor behind weaker house price growth it supports underlying demand for rental homes.

Affordability remains attractive in many regional cities where house prices have not registered the gains seen in south eastern England. Liverpool has the lowest income required to buy and has the highest rate of price growth at 5%. We expect prices to continue to increase in cities where housing is in reach of those on average incomes.

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