First-time house buying '33% less affordable

Getting a foot on the property ladder is now 33% less affordable than it was 10 years ago, and if house prices and interest rates rise as expected, this figure will rise to 46% by the end of the year, according to research released today.

Roof, the magazine of housing charity Shelter, claimed that the number of first-time buyers entering the market had "collapsed" from 569,000 in 2001 to just 359,000 last year - the lowest since records began 30 years ago. It also announced that traditional methods of measuring affordability have masked the true scale of the problem.

According to these measurements, mortgage payments have become more affordable in recent years due to falling interest rates, and this has helped offset rising house prices. However, the magazine pointed out that such calculations only reflected the incomes of people who had succeeded in getting on to the property ladder, and their incomes had risen much faster than average.

The magazine instead looked at specially commissioned data on the incomes of all households of working age to assess how easy it is for people to buy their first home. It found that in 1994 the average first-time-buyer property cost ?48,231 and average incomes for a working household were ?2,271 a month before tax. This meant that someone taking out an 85% mortgage on their first property would spend around 12.5% of their income on repayments.

However, by 2003, the average cost of a home bought by someone taking their first step on to the property ladder had soared to ?118,811, while average incomes had grown to ?3,462 a month, meaning payments on an 85% mortgage took up 16.7% of monthly pay - a 33% jump.

This trend is set to continue: Roof predicts that by the end of this year the price of the average first-time buyer property will have reached ?128,316, with mortgage repayments costing a hefty 18.2% of monthly pay.

Traditionally, the magazine said, the disappearance of first-time buyers should be a clear signal that the market was about to slow down, but it had actually shown fresh signs of growth during the past two months.

One reason for this, Roof suggested, could be "frenzied buy-to-let investment" by existing homeowners, which was making up for the fall in the number of first-time buyers entering the market. The magazine said buy-to-let investors were the unknown dynamic in the market, particularly in terms of whether rising interest rates would make them more likely to sell their property than ordinary homeowners.

"This volatile new dynamic seems set to play a key part in determining what happens next," said Julian Birch, author of the report. "If buy-to-let investors cut and run, this could be the catalyst for a severe slowdown. On the other hand, if existing homeowners continue to see buying another home to rent out as the best investment bet for the future, the gap between housing's haves and have-nots could continue to widen."

Meanwhile the Council of Mortgage Lenders said the number of first-time buyers entering the market fell to 29% last year, from 50% in 2001. At the same time they were paying an average of ?96,000 for their first property compared with ?42,000 10 years ago.

Sue Anderson of the CML said the housing market was having to adjust to having fewer first-time buyers. Typically, she said, around half of purchases were by first-time buyers - but this has now fallen to around a quarter or a third.

"This main engine of the housing market isn't operating as strongly as it normally does," she concluded.