Are First Time Buyers Really Priced Out?
Are first time buyers really priced out?
As a landlord and as someone who advises landlords, even deigning to ask this question may not make me Man of The Year. And the answer will not win me a popularity contest at a Generation Rent or Priced Out event.
But, I ponder this question every week as, on my way to my five a side football, I drive past the first flat I bought in the spring of 1986, at the tender age of 25, in Lewisham. Would I be able to buy this today?
So I thought I would take a look at the numbers.
I can still recall what the property cost – a nice, newly converted two bed flat. It cost £36,000. And the lovely building society (now since disappeared) lent me £30,000 of that. So, about 85% of the cash.
Mortgage interest rates on the day I bought it were, I recall, about 10 per cent. They went down quite sharply in the next few years, but 10 per cent was what they started at and remained at for about six months.
So, my mortgage cost me £3,000 per annum. Now I recall that, back then, (and until 1989 for new mortgages), there was a little something called MIRAS (Mortgage Interest Relief At Source), which meant the payments were a little lower, so let’s say £2,800, to be generous.
I earned £11,500 per annum, slaving away at a pretty crappy and weird trading company (now also gone). But that was considered a good salary then and the fact that it was good was no doubt helped by the fact that I was also studying for an MBA at the time.
So, if you do the maths you can see, the mortgage costs were about 24% of my income.
Today, I’m guessing a smart graduate of 25 would earn around £40,000 per annum.
The very same property today is on the market for £300,000. If our smart young twenty something graduate gets a 85 per cent loan to value residential mortgage, his interest rate might be as low as 1.75 per cent. This would equate to mortgage interest payments of a shade under £4,500. (1.75 per cent of a loan of £255,000, which is 85 per cent of the £300,000 the flat costs today).
So, he will pay just a little over eleven per cent of his income as a mortgage. And this is a great deal less than the percentage that came out of my earnings back in 1986. Indeed, our graduate today would need to be earning just £18,750 for his mortgage interest payments to gobble up the same percentage of his income as my mortgage did back in 1986.
And yet the likes of Generation Rent like to tell folks that people are priced out in a way they were never priced out before.
But on these figures, is that really true?
And mortgages are widely available too. Lenders today seem to have got over their panic in 2008/9 and are now lending freely to people who can afford it. And with interest costs at just ten per cent of income it would be pretty tight lender who said “No” to offering a mortgage to our modern applicant on £40K a year.
And back in 1986, whilst we had MIRAS, we did not have Help to Buy ISAs and the many other schemes that are around today either to help first time buyers.
The only drawback today is that some today will be paying off student loans. But that does not swing the maths all that much, I think.
I actually caught the property bug back then in 1986. The price of my flat rose sharply in the next two years, which was great.
And I found out that I could let out my smaller second bedroom for £160 per month or £1920 per annum, or 64% of what the mortgage was costing me).
The option of letting the second bedroom is still, of course, available today – in fact it is legally sanctioned by the state who dole out a tax free “rent a room” amount of £7,500, (which was not the case in my day back in 1985).
By my reckoning the twenty something of today could let the pretty nice second bedroom for the full £7,500 per annum, which is a whopping £3,000 more than he will pay on his mortgage. (Remember, back in 1986 I could “only” get 64% of my mortgage by renting the second room).
And don’t forget, in the examples above, I am looking at just a single income, not a combined income. If there are two incomes, the affordability issue makes buying today even more of a steal.
So, there is my evidence. Dispute it at your leisure.
Could it be that young people today just like to spend their money on other things and are “not viagra online no rx into” saving? After all, there is more to spend it on today. The young twenty somethings I know seem to have more holidays, go to more restaurants and just have more stuff. And in the summer there are at least five music festivals every weekend to go to, whereas we had just Reading and Glasto in the whole summer.
These home truths need expounding. I know I won’t be popular, but feel free to challenge.
Simon L, who is a personal friend and accountant, (yes, I have many friends who are accountants!), did challenge some assumptions.
He pointed out that, of course, there is a high risk that interest rates could rise (from their current low point).
He agreed with the impact of student loan repayments today, and pointed out that this would drag todays’ twenty something down by £2,000 per annum (based on a £40,000 salary). He said this could be a not insignificant restriction in practice, especially when combined with the impact of higher rents today, which would make it that much harder to save for the deposit. And that deposit, he also noted, forms a higher chunk of todays’ first time buyers’ income. I accept this is also a very valid point. The ratio of the deposit I paid in 1986 to my gross income was equal to a half a year of income. The ratio today is 1.125 times a years’ gross income, so that is true, it is a bit more of struggle to get the deposit today.
Also, the bigger amount borrowed today, means more capital to be paid off eventually. So, this makes things trickier for the borrower today, because the capital amount borrowed is a bigger chunk relative to income than it was in my day. (It is 6.375 times todays’ current income (£255K / £40K), whereas in my day it was only 2.6 times my income (£30K / £11.5K)). These are valid points to consider over the long term of a mortgage.
However, Generation Rent and their fellow travellers argue that it is very hard to save for a deposit today because rents are so high. But that is simply not true. If we look at 1986, the rent I got on the second bedroom was just 16.6% of my income at that time (£1,920 divided by £11,500) . Todays rent on the second bedroom would be 18.7% of todays income, so not much difference there in percentage terms. (£7,500 / £40,000). So, this argument does not really add up to very much at all.
Feel free to join the debate. Go to “Add a Reply” at the bottom of this post, after the “About LettingFocus” info.
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