I recently read an article in the Telegraph presenting this story.
In previous years mortgage lending was simpler. I am sure readers remember strict lender ratios applied to incomes when calculating potential mortgage loans. Why was this practice cast to one side and reckless lending allowed? Was it a necessity or the fuel to a period of massive house price gains in the 80’s and mid 90’s to 2008.
If you look at the tables below we see that average house prices across the UK compared to average UK incomes give a 75% LTV equal to a 2.5 x joint income lending policy. It leaves the necessity for house borrowers to need a deposit of between 18% and 24%. First time buyers looking to buy a flat appear to be fine, a deposit of –3%…can this be right?
Something must be array. We constantly read articles about property prices not being “affordable” and first time buyers being out priced from the market. We must conclude that average house prices across the UK and in desirable regions are not reflective of the real market. The final table below uses Rightmove average house price figures for May 2010. This shows a different story and an eye watering deposit of 29%.
If lending is capped to 75% or back to 2.5% joint income to restrict “reckless lending” the impact on the property market will be considerable and make property even less affordable then it is today. Purchasers are already finding it extremely hard to get onto the property ladder or upsize as families grow and owners need more space.
Whilst the Government needs to stop “reckless lending” they must be careful not to yield a crushing blow. This policy will not affect buyers with significant deposits / cash sums as their lending requirement are generally far below 75% of LTV. However it will make a significant impact to first time buyers and purchasers on low incomes with small deposits.
Average house price data taken from BBC website
Average household income for 2008/09 is £53,900, data taken from National Statistic website
Income £30,000, 3 x income £90,000, Partners income £23,900, 2.5 x joint income £134,750, Average price terrace house in UK £177,633, Deposit required £42,883 approx (24%)
If the Bank of England capped LTV to 75%, (75% of £177,633 = max loan of £133,224) requiring a 24% deposit.
In the South of East property prices are higher, however incomes are higher and based on average terraced house prices the level of deposit is lower at 18%, for a flat the deposit is –3%.
Income £40,000, 3 x income £120,000, Partners income 27,300, 2.5 x joint income £168,250, Average price terrace house in South East £204,975, Deposit required £36,725 approx (18%)
Income £40,000, 3 x income £120,000, Partners income £27,300, 2.5 x joint income £168,250, Average price flat in South East £163,198, Deposit required £-5,052 approx (-3%)
Rightmove are quoting slightly different statistics. Their average UK house price is £237,134. Rightmove measured 108,940 asking prices – circa 90% of the UK market. The properties were put on sale by estate agents from 11th April 2010 to 8th May 2010 and advertised on Rightmove.co.uk. Data taken from the Rightmove Website.
Income £40,000, 3 x income £120,000 Partners income £27,300, 2.5 x joint income £168,250, Average UK house price £237,134, Deposit required £68,884 approx (29%)
