New affordability index shows ability to buy strong in every region except London
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Leading residential agent, Hamptons International, announced the launch of its new Ability to Buy Index today. Published on a quarterly basis, it is the only affordability index available which measures the pressures buyers face from changes in the cost of living as well as changes in interest payments and house prices. It looks beyond the traditional house price or mortgage-payment-to-income measures by including the cost of spending on essentials to reveal the real ability to buy. The Ability to Buy Index goes back to 1997 and provides the most accurate gauge of affordability for different households across the country.

The findings show:

• Ability to buy is now significantly better than at the start of the financial crisis (2008). With interest rates at historic lows and prices still 5% below peak levels, the index has increased from 48 at the top of the market (Q3 2007) to 86 in Q2 2014. (see chart 1).

• Low mortgage rates mean ability to buy is better despite the fact that the amount of income left to some families after paying for essentials, is about six percent (£60 per month) lower today than at the time of the financial crash in 2008 (see chart 2 - appendix).

• This said ability to buy has worsened over the last two quarters by two per cent and three per cent respectively because of rising house prices, stagnant wages and the rising cost of essentials.

• Compared with 2007, ability to buy is much better everywhere in Great Britain except London. However house price growth in the capital is now easing which will slow down the rate of deterioration. (see map – appendix).

• Households with children are among the most constrained in their ability to buy. The average first time buyers’ ability to buy is still better than it was in 2007 – but this does not take into account the difficulty of raising a deposit.

• Looking ahead, as the economy improves, so will the ability to buy and prospects for the housing market. Wages are expected to begin to rise in real terms in 2015 which will help, although rising interest rates will offset some of this.

Commenting on the findings of the Ability to Buy Index, Fionnuala Earley, Director of Research at Hamptons International said:


“Housing affordability is crucial to the health of the residential market and to the wider economy, yet up until now no one measure has taken into account the cost of living. Hamptons International’s Ability to Buy Index uniquely takes into account the effect of households’ essential spending, as well as income and mortgage payments, which gives a more accurate picture of affordability and hence a clearer insight into the real prospects for the housing market.


“Over the last five years the post-tax income of a full time working couple has increased by just nine per cent, but rising costs mean that spending on essentials such as food, transport, childcare and utilities has increased by 28 per cent. Today, the income households with children have left after essential spending is about 6% less than in 2008. Put simply there is less left in families’ bank accounts at the end of the month to service a mortgage, save for a deposit or spend on non-essentials.” (see chart 2 - appendix).

 

Ability to buy across the country


“Our analysis also shows that ability to buy across the country (but excluding London) has improved since the start of the recession when both house prices and interest rates began falling. (see map – appendix). It continued to improve in the North and deteriorated only slightly in the South (excluding London). London is the stand out exception. Here ability to buy is now worse than it was before the crash.” (see chart 1).


Chart 1 – Ability to buy by region and over time

 

Source: Hamptons International Research

Ability to buy by household

“There are marked differences in the ability to buy not just by region but also household type.  Of the household groups we looked at those with children were most constrained in their ability to buy with childcare (for a two child household) accounting for about half of essential spending.

“Taking all essentials into account shows that mortgage payments on an 85 per cent loan would leave a full-time worker household with children with 66 per cent of their income left after mortgage payments and essentials.  A household with one full and one part-timer with children would be left with just 42 per cent.  However the first time buyer would be hardest hit with just 38 per cent left available. (see chart 3 - appendix).

“The situation is exacerbated in London where finances are stretched even further.  While the full-time worker household with children is left with about 40 per cent of income after mortgage payments and essentials, mortgage payments exceed the amount of available income for the full and part-time households with children and the first-time buyer.

“For average earners, buying the average priced house there is a real affordability constraint which limits the opportunities for households to enter the market in London.

“Looking ahead, the risks are that house prices continue to increase without any real increase in wages and that interest rates rise too causing a fall in ability to buy. 

“This said, for most parts of the country it would take a significant rise in mortgage rates for ability to buy to deteriorate to 2007 levels.”

 

For further information and for a copy of the Ability to Buy report please contact:


Alison Blease, Hamptons International Press Office
020 7758 8422 / 07769 677 825/ bleasea@hamptons-int.com

Fionnuala Earley, Residential Research Director
07760 163 120/earleyf@hamptons-int.com

 

Note to editors:
1. The Ability to Buy Index is constructed using data from the Annual Survey of Hours and Earnings, Labour Force Survey, HM Land Registry, HMRC, Family and Childcare Trust, Family Spending Survey and DCLG
2. Essential spending is spending on Food, Transport, Utilities, Council Tax and Childcare
3. Mean rather than median earnings from ASHE are used as a more representative measure of the income of households likely to buy their own homes
4. The index is based at 1997=100

 

About Hamptons International

Hamptons International is a leading residential estate agent and property services organisation, operating in London and the South of the UK.  With more than 140 years of experience in the property market and a commitment to industry innovation and exceptional levels of customer service, Hamptons International today offers a wealth of award-winning services including UK and international Sales, Lettings, Property Management, Corporate Services, Residential Development, Development Land, Valuation and Property Finance.

With headquarters in London’s Mayfair, Hamptons International has an international network of more than 85 offices and is a subsidiary of Countrywide, the UK’s largest estate agency and property services group.                               

Appendix

Chart 2 - Income available after tax and essentials by household type

                            

Source: Hamptons International Research

Chart 3 – Percentage of available income after essentials and mortgage payments – Q2 2014

Source: Hamptons International Research

Note: Based on current average house price (adjusted for FTB), 85% LTV and current mortgage rate

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