House deposit to earnings ratio hits all-time high, as typical buyer now puts down 110% of annual income as a deposit

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  • A 20% House Deposit Now Equals to 110% of Full-time Salary, Says Nationwide
  • This was up from 102% a year ago, thanks to soaring home prices.
  • The total cost of the house now is 5.5 times the income, compared to 2.1 times in 1995
  • 31% of first-time buyers are using take-home pay to pay off their mortgage

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With house deposits hitting an all-time high relative to what people earn, the average first-time buyer is now putting down 110 per cent of his annual income to secure his home.

A 20 percent deposit on a home now equates to 110 percent of a full-time adult worker’s average, pre-tax annual income, according to Building Society Nationwide, one of the UK’s largest mortgage lenders.

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This has increased from 102 percent a year ago, as house prices have risen at a faster rate than people’s salaries.

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First time buyers now have to save 110% of their annual income to deposit the house

Home prices have risen dramatically over the past year, with Nationwide’s last index reporting the typical home was worth £250,011 in September – a 9.9 percent increase in just one year.

Meanwhile, the Office for National Statistics reported an underlying annual increase in wages between 3.6 percent and 5.1 percent in the three months to July 2021; Latest figures available.

An increase in the home price-to-income ratio (HPER) is a particular problem for first-time buyers, because unlike home movers they cannot use the equity they have built up in their home to make up the bulk of their deposits.

Andrew Harvey, senior economist at Nationwide, said: ‘One of the consequences of higher home prices relative to income is that it makes finding a deposit a significant challenge for potential first-time buyers.’

Nationwide reported that, in the third quarter of this year, the typical home price for a first-time buyer was 5.5 times their income.

This was above the previous high of 5.4 in 2007, and well above the long-run average of 3.8.

Back in 1983 when the nationwide indexing began, first-time buyers paid only 2.7 times their annual income for a home, and at one point in 1995 they were paying a record-low of 2.1 percent of their annual income.

Proportional value: Today, the cost of an average home is 5.5 times a first-time buyer's salary -- but 25 years ago that figure was as low as 2.1 times annual income.

Proportional value: Today, the cost of an average home is 5.5 times a first-time buyer’s salary — but 25 years ago that figure was as low as 2.1 times annual income.

However, the proportion of first-time buyers seeking help paying their deposits has increased only marginally in that time, from 27 percent 25 years ago to nearly a third today.

James Forrester, estate agent Barrow and Forrester’s managing director, said: ‘Where the property market is concerned, much has been made about the government’s success in negotiating the pandemic.

“While it is fair to say that the market has never looked strong, this statement is largely based on perspective.

‘If you own a house and it has increased in value by double digits over the past year, you are no doubt on the moon.

‘However, those struggling to put together enough deposits are unlikely to share this opinion.

‘The cold reality is that if you don’t want to buy from the Bank of Mum and Dad with the financial backing of a second wage, support, or you don’t make much more than the average person in your respective field, the homeowner dream is the one you want. You are unlikely to feel much later in life than you would like.’

Nationwide research showed that some areas were more affordable than others, however.

London has the highest home price-to-income ratio of any region, with the typical home price being nine times the median salary – although this was down from its record high of 10.2 times the salary in 2016.

Meanwhile, Scotland has the lowest house price-to-earnings ratio in the country at 3.4; It is followed by Northern Zone at 3.5.

Nationwide also looked at the average time it took someone earning a typical salary in each area to save a 20 percent deposit for the average first-time buyer’s property, assuming they moved their home each month. Set aside 15 percent of the salary of Rs.

Buyers in Scotland and the North can save a 20% deposit for a home in six years, while buyers in London may face a 16-year wait.  In the Southwest, it takes about 11 years

Buyers in Scotland and the north can save a 20% deposit for a home in six years, while buyers in London may face a 16-year wait. In the Southwest, it takes about 11 years

In Scotland and the north, it would take about six years – while in London it would take about a decade. People in South East and South West face savings of around 11 years.

The nationwide research also looked at the cost of mortgage payments relative to wages.

Currently, first-time buyers pay about 31 percent of their take-home pay on their mortgages.

That’s not a huge difference compared to when the Nationwide Index began in 1983, when first-time buyers paid for their mortgages for just over 25 percent of their earnings.

However, in the mid-1990s they were paying only 15 percent, and a year earlier in the third quarter of 2020, just over 27 percent.

Interest rates are currently very low historically, which is good for first-time mortgage buyers – but the fact that savings rates are similarly low means that getting deposits together has become harder.

Mark von Grunder, director of property agent Benham & Reeves, said: ‘Record low interest rates over such a long period have been great for people who are taking their first step on the property ladder with a mortgage, but they are terrible. There are those who are trying to save.

‘Unfortunately, no big deals can be made, although the cyclical nature of the property market suggests that what goes up, will come down.

‘So sitting tight and waiting for improvements is probably the best immediate bet for struggling homebuyers.’

Although it is still cheaper to service a mortgage than it was in the run-up to…

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