First-time buyers – current challenges

Several first-time buyers are now facing a real struggle to get onto the housing ladder. Economic factors have become instrumental in affecting a buyer’s affordability – especially those looking to buy with a mortgage.

Currently, UK house prices are at record-breaking levels. As of March 2022, based on the latest figures released by the UK House Price Index, the average house price in the UK is £278,436. Property prices have risen by 0.3% compared to the previous month and are up by 9.8% compared to the previous year.

Furthermore, the UK’s official rate of inflation is now at a 40-year high after it reached 9.0% in March. While the average UK wages continue to grow this is negatively reflected by the rate of inflation. Meaning, workers are effectively left with a pay cut and this is only set to get worse due to the planned national insurance tax increase as well as the energy price cap rise.

With this in mind, a special report at the end of 2021 by Nationwide highlighted that raising a deposit is still the biggest hurdle for first-time buyers (FTBs) as affordability becomes even more stretched.

The report’s key findings were:

  • High house prices relative to average earnings continue to make raising a deposit a significant barrier for FTBs
  • 20% deposit equivalent to 110% average income – a record high and up from 102% one year ago
  • House prices have risen quicker than earnings over the last year resulting in an increase in cost of servicing a mortgage relative to take-home pay
  • North & Scotland regions remain the most affordable

What impact could rate rises have?

The Monetary Policy Committee (MPC) meets around every 6 weeks to discuss if the base rate should go up or down. On the 5th of May 2022, the MPC voted in favour of another increase to the base rate of interest by 0.25 percentage points to 1%. This is the highest interest rates have been in 13 years.

Tim Bannister, Director of Property Science at Rightmove, said:

“It will take time for the rise in interest rates to feed through to the market, and despite further rises being a possibility this year, right now the data suggests this is not dampening the desire for people to move. Despite economic headwinds such as the rise in cost of living, buyer demand is still up around 60% from the more normal 2019 market. The home and where we live has become even more fundamental for people over the last couple of years, meaning that even with economic challenges, people are still prioritising this decision.

We do anticipate affordability constraints and these economic headwinds such as rising interest rates to have more of an effect on the market later in the year. People will need to make decisions around what they can afford, which may mean some people need to lower the property price bracket they are aiming for, assess the mortgage products available in terms of duration and fixed-rate length, or raise a higher deposit in order to borrow less.”

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