Housing affordability has shown “modest improvement” in the last year due to earnings growth and a fall in borrowing costs, a report has shown.
According to Nationwide’s housing affordability report, a prospective buyer earning an average income and buying a first-time buyer home with a 20% deposit would have a monthly mortgage payment equal to around 36% of their take-home pay, above the long-run average of 30%.
House prices are high relative to average earnings, with the first-time buyer house price to earnings ratio coming to 5.0 at the end of 2024, higher than the long-run average of 3.9.
Andrew Harvey, senior economist at Nationwide, said that, as a result, the “deposit hurdle remains high”.
“This is a challenge that has been made worse by the record increase in rents in recent years, which, together with the cost-of-living crisis more generally, has hampered the ability of many in the private rented sector to save,” he added.
Harvey said around 40% of first-time buyers needed some assistance to raise a deposit, either in the form of a gift loan or inheritance due to these deposit challenges.
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He noted that while there were affordability challenges, mortgage market activity and house prices were “surprisingly resilient in 2024”. Annual house price growth stood at 4.7% at the end of the year.
Mortgage approvals have also returned to 2019 levels despite elevated mortgage rates. First-time buyer mortgage market share stood at 54%, a slight improvement on 51% pre-pandemic.
“Looking ahead, providing the economy recovers steadily, as we expect, the underlying pace of housing market activity is likely to continue to strengthen gradually as affordability constraints ease through a combination of modestly lower interest rates and earnings outpacing house price growth,” Harvey added.
From a regional perspective, the report stated that all regions have reported a “modest improvement” in affordability since 2023 in terms of costs of servicing the typical mortgage as a share of take-home pay.
London reported the biggest improvement due to weak house price growth, but is still the least affordable region. The house price to earnings ratio stands at 8.
The lowest is Scotland at 3.
Affordability pressures are pronounced in South of England and East Anglia, whereas for Northern regions in England and Scotland, mortgage payments are closer to their long-run average.
The report found that mortgage payments relative to take-home pay, estimated by average earnings per occupation and the price of typical first-time buyer property, was lowest for those in managerial and professional roles, where average earnings tend to be higher.
Nationwide noted that those who are in higher-paid positions may tend to buy more expensive properties.
Harvey said: “Affordability is most challenging for those working in areas classified as ‘elementary occupations’, which include jobs such as construction and manufacturing labourers, cleaners and couriers, and those in care, leisure and other personal service jobs. In these groups, typical mortgage payments would represent over 50% of average take-home pay.
“The differences in affordability reflect the divergence in earnings by occupational group. For example, those working in professional occupations typically take home around twice as much per year than those working in sales and customer service.”
