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.

Generation Rent

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.

Property Bug

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.

The 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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4 comments

  • Interesting analysis and it wasn’t easy for the older generation to afford the properties they wanted. But you have missed several points from your analysis. Firstly it is difficult to see how someone aged 25 can have £45,000 deposit saved (15% of £300,000), plus £5,000 stamp duty, presuming they graduated at 21 or 22, are paying roughly £250 a month back to their student loan alongside the £125-£150 a month season ticket it takes to travel from zone 2 or 3 to zone 1. Unless they have wealthy parents.

    Both those outlays affect how much you can borrow. The £500 a month for those plus, say £100 a month pension contribution, will reduce the amount a bank will lend buy up to £60,000. Quick search on Moneysavingexpert suggests someone earning £45,000 will be able to borrow between £146,000 and £203,000. Plus their £45,000 deposit and they are very much short.

    That flat won’t sell for £300,000 either… They will be gazumped by a cash buyer willing to put down £330,000.

    • Thanks, I agree the student loan does cut into it – reducing borrowing potential (getting a mortgage).
      Season ticket does not seems more expensive in real terms than 1986, but you may know more!
      I did acknowledge in the blog that the deposit required is a bigger chunk relative to FTBs incomes today than it was in 1986 – I accept that point fully. I think I said 1.125 years pay v half a years pay in 1986.

  • Hi David

    Evidently I won’t win man of the year either. I have been saying exactly this for the last 5 years based on “up north” prices

    Our first house was a 2 bed terrace. In 1989 we paid £30K. I was just out of university and earned wage of £7000, my wife earned £3000, so a total of £10000, which means the house price was 3 times the joint income.
    Interest rates were 14.5%. (haven’t broken it down as exactly as you have but will have figures somewhere if challenged)
    Basically my wages paid the mortgage, the car and the bills and my wife’s paid for the food/clothes/night out if we could afford one.
    (With only very minor increase in income we traded up to a 3 bed semi 18 months later which required a further 10K input on price and so was affordable then too)

    The exact same house today I can buy for £90,000 (somewhere between 80 and 100K on recent sale prices on Zoopla within ¼ mile)
    Same jobs for current 25 year olds £36k and £15K, total 51K – 3 times this is £153K – (the semi we moved to is approx 140K currently – so still affordable)
    Interest rates as you say are available from 1.75%
    How cheap it is in comparison to our younger days

    Student debt, Ok, its an 8% tax on income (this is how the mortgage companies explained it to me) so take off 8% of 36K still leaves over 33K on university based salary)

    I have a relative in his mid 20s and single (not sure on his exact income but not excessive by “up north” standards) and he has bought a £100K house in a good area of town, but sold his expensive car to fund the deposit and is running around in an 8 year old mini. I can repeat the same for several other 25-35 year old friends at my local sports club. Anyone with a reasonable work situation and is sensible with money and who wants to buy a house can buy one, and those that like spending can’t.

    Its the “I want it all now” attitude that prevails unfortunately, Credit card debt accrued on nights out/holidays/new cars will always affect future plans
    Went on a stag do recently, and the “youngsters” thought nothing of spending £1200 for the 3 day weekend but complain they have no money….

    Oh well, they will be the ones in 20 years complaining how “lucky” us house owners are.

    They won’t think of the things we declined in order to fund our dreams, or the years spent studying to gain qualifications whilst they played out in the sun, which improved my employment and career prospects
    All of this work enabled me to build my business and property portfolio, which again I am often told I am “so lucky” to have. Do these people think someone just handed me 80 houses?????

    I think I prefer your “down South” capital increases, but more risk and can’t get the same profit on a day to day rental basis so staying up north where beer is still less than £2 a pint if you look for it. 

    Cheers

    Andy

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