RBS Reports a Squeeze on First Time Home Buyers in the UK

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(UNITED KINGDOM) -- A new "Ability to Buy Index" from Royal Bank of Scotland paints a mixed picture for first time buyers in Britain. While average mortgage payments have fallen to 2003 levels, it is now more difficult for first-time buyers to get a foot on the housing ladder than during the 2009 recession.

RBS says the quarterly Ability to Buy Index gives the most realistic picture available of the real squeeze facing first-time buyers (FTB) in the UK.

"Our new index provides the most accurate picture available today of the squeeze on first-time buyers, by including the effects of tax, National Insurance, earnings and rising living costs, in addition to house prices and interest rates," says Fionnuala Earley, RBS Group UK Consumer Economist. "Our first results show that higher living costs are making it more challenging for first-time buyers to enter the market, despite the lowest mortgage payments in almost a decade. But the news is not all bad;  inflation is now beginning to fall and assuming earnings still rise and interest rates remain low, this should help to improve the ability for first time buyers to enter the market."

The first release shows:

• The RBS "FTB Ability to Buy Index" has deteriorated for three consecutive quarters. At 98.6 in Q3 2011 compared with an average of 96.5 in 2009. The index also shows it's harder to buy now than in the 2009 recession. This contrasts with house price to earnings measures which suggest conditions have improved.

• The rising cost of essentials during 2011 has outweighed the effect of falling house prices and rising incomes on the ability to buy.

• Ability to buy has deteriorated most in the East of England, East Midlands and London since 2009. The biggest improvements were in Northern Ireland and the North East.

But the results also contain some encouraging news. Low interest rates mean that even with the squeeze on household income, the debt-servicing burden has fallen to 2003 levels.

• In Q3 2011 a first-time buyer repayment mortgage took up just 52% of discretionary income (income after tax, National Insurance and spending on essential goods and services). At the peak of the market in 2007 this proportion was 84% and in 1990 it was as high as 123%.

• But rising living costs have prevented this improving further. Compared with the 2009 recession, the debt servicing burden, after taking tax and living costs into account, improved by 5.8%. Measures based on gross income suggest it improved by 8.7%.

Low interest rates and squeezed discretionary income also mean that it will take a long time to save for a deposit, but not as long as in 2007.

• Assuming that house prices stay still, earnings grow at a modest annual rate of 2.5% and FTB can save 30% of discretionary income, it would take three years to save a 10% deposit.

• In London it would take eleven months longer, but in the in the North East it would take just 29 months to save a 10% deposit.