The challenges facing first time buyers and uspizers right now all boil down to one thing: affordability. And buyers in the south of England are suffering the most on this front. Our Executive Director of Research, Richard Donnell, takes a look at what’s happening in the housing market.

The divide in market activity between the south of England and the rest of the UK is becoming starker on the back of higher mortgage rates.

Why are homes in the south more expensive?

After the global financial crisis in 2007, house prices in southern England rebounded, largely led by London. By 2014, house prices in London were rising at a rate of 20% year-on-year.

In 2015, mortgage regulations were introduced to prevent households taking on unsustainable levels of debt, which can lead to a boom/bust cycle for house prices.

However, those regulations came a little too late for southern England, where prices had already jumped ahead.

Since 2016, we have seen house price inflation under-perform, especially in London, and one key reason for that is the impact of those mortgage regulations.

They’ve meant that buyers have needed to inject more equity into the home they want to buy, in order to make their mortgage repayments more affordable.

The impact of stress testing mortgages and limiting high loan-to-income lending has since led to a decrease in buying power, which in turn has created a cap on demand.

Incomes needed by first-time buyers across the UK

The chart below shows the gross household income needed to rent and buy a typical first-time buyer priced home.

Richard's weekly: gross income needed to buy and rent a typical first-time buyer home

If a buyer is taking out an 80% loan-to-value mortgage (using a 20% deposit) at a rate of 4.5%, the income needed to repay it is broadly the same across most of the UK.

However, because house prices are higher in southern England, for the same type of property, buyers will need to be earning considerably more: well over £100,000.

When that purchase is then stress tested to an 8.5% mortgage rate, the income needed to secure the property jumps even higher, thereby ultimately reducing the number of people who can afford to buy it.

Data from the Office for National Statistics reveals that first-time buyer incomes are generally lower than the income needed for mortgage lenders’ stress-testing rates.

So, first-time buyers are getting around this problem by putting down larger deposits.

This enables them to get their loan-to-value percentage for their mortgage down, so that they can then afford to buy their home at the current stress-testing rates – and their monthly mortgage repayments then become more affordable.

Average first-time buyer deposit in London hits £145,000

In London, this approach means the average first-time buyer needs to have a £145,000 deposit and an annual income of £90,000.

It’s a similar but less extreme position across the rest of the south of England.

However for the rest of the UK, where house prices are lower, the average deposits needed to secure a home and the mortgage repayments for it look more manageable for more would-be buyers.

Calls for higher LTV loans to be made available, alongside the loosening of mortgage regulations, would help FTBs, but they would simply add to buying power, rather than delay the needed reset in affordability.

High LTV lending is very hard to achieve across southern England and consequently 95%+ lending here is a niche lending segment.

What industry solutions might help first-time buyers?

Long-term fixed rate mortgages are an option but this is a market that needs Government support to get off the ground.

Long term mortgages could potentially avoid the need to run a stress test on the borrower at a higher mortgage rate but the ‘loan to income flow’ limit would limit the size of the market: currently lenders are only able to lend 15% of their customers loans of over 4.5x their current income.

It is likely that we will see lenders look to review how they stress test new borrowers, such as applying lower stress rates for 5+ year fixed rate loans.

This flexing of affordability at the margins will help some borrowers. But it wont deliver the reset we need to open up the market to more buyers who don’t currently have access to the levels of equity needed.

With mortgage rates unlikely to get much lower in the short term, incomes growth is going to have to do the hard work in resetting affordability across southern England.

First time buyers adapting to market conditions

Our data shows first-time buyers in southern England are adapting, looking at areas with better value for money for the type of home they need as well as considering smaller homes at lower price points.

We have seen a shift to flats, which have attracted less demand in recent years, as first-time buyers targeted 3 bed homes at lower prices where there was the potential to improve the home.

The average value of a flat in London is just 3% higher than at the start of 2016. This compares to a 13% average increase for flats nationally and 39% for a house in the UK. This underperformance has made flats more affordable relative to incomes and explains the increase in demand.

Buyers should know though, that flats are often sold under the leasehold, which can mean additional running costs such as service charges and ground rents.

Richard's weekly: House price inflation by property type and region 2016 - 2024

Key takeaways

  • In 2014, London house prices were rising at a rate of 20% year-on-year
  • In 2015, mortgage regulations began to include stress tests, often at rates 3% higher than the mortgage deal being offered
  • This has reduced buying power in the south, where homes are more expensive
  • In 2024, the average first-time buyer in London needs to have a £145,000 deposit and an annual income of £90,000