FTBs facing huge affordability squeeze – but will Tories help?

The way I see it housing affordability is a largely southern England problem, compounded by 2015 mortgage regulations that will take time to unwind.

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.

Southern England house prices rebounded after the global financial crisis led by London. In 2014 London house prices were rising at 20% year-on-year.

Mortgage regulations introduced from 2015 to stop households taking on unsustainable levels of debt and driving a boom/bust cycle for house prices came a little too late for southern England where prices had jumped ahead.

Since 2016 we have seen house price inflation under-perform, especially in London.

One key reason is the impact of mortgage regulations that mean buyers need to inject equity to make buying a property affordable for their income. The impact of stress testing mortgages and limiting high loan to income lending is to cap demand and buying power.

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

At a 4.5% mortgage product rate and 80% LTV it’s the same income for ‘the rest of the UK’ but the gap grows across southern England.

By the time the purchase is stress tested at an 8.5% mortgage rate the income to buy jumps higher. The higher the income to buy the fewer people that can buy.

Data from the ONS for first-time buyer deposits and incomes shows that first-time buyer incomes are lower than the stress rate income.

LARGER DEPOSITS

This is because first-time buyers are putting down larger deposits to get the LTV down to a level where the income to buy is more attainable.

In London it means a £145k deposit and an £90,000 household income. It’s a similar but less extreme position across the rest of the south of England. The rest of the UK averages look more manageable for more would-be buyers, mainly due to lower house prices.

Calls for more higher LTV loans and/or loosening of these mortgage regulations would help FTBs but they would simply add to buying power and delay the needed reset in affordability.

NICHE LENDING

High LTV lending is very hard to achieve across southern England and 95%+ lending is a niche lending segment. Long term fixed rate mortgages are an option but this is a market that needs Government support to get off the ground.

It could help avoid the need to run a stress test on the borrower at a higher rate but the loan to income flow limit (Maximum 15% of loans over 4.5x LTI) would limit the size of the market.

It’s likely we will see lenders look to review how they stress test new borrowers – they can apply lower stresses for 5+ year fixed rate loans. The more the industry flexes affordability at the margins this will help some borrowers, but it won’t deliver the reset we need to open up the market to more buyers who don’t have access to the levels of equity needed.

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

Richard Donnell is Executive Director at at Zoopla