The average price of a house for first-time buyers in the UK rose by 7.4% in November compared to the same month a year earlier.
Statistics released by the Office for National Statistics on Tuesday found price growth for first-time buyers accelerated from October’s figure of 5.9%. You now need an average of £221,000 to get on the housing ladder in Britain.
The jump in prices for first-time buyers more or less mirrored an acceleration in the wider housing market, with UK house prices up 7.7% in November. But that will be little solace for the legions of people trying to save for a house right now.
Aspiring home owners are caught in a Catch-22 right now — house prices are rising faster than most people can save, due to rock bottom interest rates and slow wage growth. And the faster they rise, the more people feel they can’t afford to sit on the sidelines — the market is running away from them.
Good luck saving…
The average salary in the UK is around £26,000 according to PayScale.com. If you can save around 20% of that each year, as many financial planners recommend, you’re looking at £3,840 after tax. If you’re in an “average” couple that’s £7,680.
Let’s say both of the people in the couple have a Help to Buy ISA, which adds 25% to each of their savings. You can only invest £3,400 in those per year (that comes out of each one’s £3,840 savings total) so would get a government bonus of £840. Kick in best interest rate around right now of 4%, only accruing on what you put in not the government bonus, and you’ve got £4,376 in each account.
So, after a year of hard saving, the average UK couple would have £9,632 to put towards a deposit. The first bit of bad news is that the lowest deposit for the average starter home right now £22,100 (using a 10% deposit rate). Our couple is more than £12,000 short.
But the real kicker is that, in all likelihood, they will need a lot more than that. The goalposts will have been moved. If the price of a starter home increases by another 7% in the year to November 2016, they will need £23,647 for a deposit — an £11,000 shortfall. Even if it’s a more modest 5% rise they will need £23,205.
Every indication is prices will continue to rise too, as this chart of price-adjusted index of property prices from the Office for National Statistics demonstrates:
The house price index hit a new high in November, beating October’s record, and is now 19.4% above its pre-economic crisis peak, according to the ONS. The trend is upwards.
Once you’re on the housing ladder you’re in a peachy position — you’ve got a big chunk of capital gaining value at the same rate as the runaway property market and you’re paying down the mortgage at great rates if you’ve got a mortgage tied to current interest rates.
But those reaching for the first rung on the ladder face find it receding further and further from reach. That’s down to interest rates and wage growth.
Interest rates are at a record low of 0.5%, with the Bank of England signalling they’re set to stay low for a lot longer, meaning savings are more or less stagnating. Meanwhile, total pay between August to October 2015 grew by 2.4% — way below property price growth.
The ONS notes this passingly in a throwaway line in its report, saying: “House price growth continues to outpace real earnings growth considerably, despite the improvements in nominal pay growth over the past year and low inflation.”
It ‘only really works for the rich’
The government is trying to address the Catch-22 by trying to bring down the price of property. Its flagship policy is a programme of 30,000 new build “starter homes” that will be sold off at below market rate. The plan both increases supply and subsidises price.
But the National Federation of Builders pointed out that even with a subsidy to market rates, most of these new homes will be out of reach for the average Briton because the average price is so high. (The ONS figures also note that new builds are now more expensive than previously occupied properties — £294,000 vs. £288,000.)
And if you’re in London — well, you can almost forget about it unless you’re in a couple and both earning £50,000+. London’s property market has become completely untethered from the rest of the country since the financial crisis and the average house price in the capital for November stood at £537,000. That means you’d need a £50,000 chunk of change to put down even the smallest deposit.
So how are so many first-time buyers getting on the ladder? Where’s the demand? One answer is they’re getting help from rich relatives or benefiting from things like inheritance. Property firm Savills recently produced a report concluding that the UK market “only really works for income rich (and typically equity rich) households.”
Those who can’t count on outside help to get on the property ladder are stuck in a Catch-22 — and it looks increasingly difficult to escape it.
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