RISING LIVING COSTS PUT SQUEEZE ON FIRST TIME BUYERS, DESPITE MORTGAGE COSTS FALLING TO 2003 LEVELS - NEW RBS INDEX SHOWS

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1 RISING LIVING COSTS PUT SQUEEZE ON FIRST TIME BUYERS, DESPITE MORTGAGE COSTS FALLING TO 2003 LEVELS - NEW RBS INDEX SHOWS A new Index from RBS paints a mixed picture for first time buyers in Britain. While average mortgage payments have fallen to 2003 levels, it is now more difficult for first-time buyers to get a foot on the housing ladder than during the 2009 recession. RBS says the quarterly Index gives the most realistic picture available of the real squeeze facing first-time buyers (FTB) in the UK. Fionnuala Earley, RBS Group UK Consumer Economist, says: Our new index provides the most accurate picture available today of the squeeze on first-time buyers, by including the effects of tax, National Insurance, and rising living costs, in addition to house prices and interest rates. Our first results show that higher living costs are making it more challenging for first-time buyers to enter the market, despite the lowest mortgage payments in almost a decade. But the news is not all bad - inflation is now beginning to fall and assuming still rise and interest rates remain low, this should help to improve the ability for first time buyers to enter the market. The first release shows: The RBS FTB Index has deteriorated for three consecutive quarters 1. At 98.6 in Q compared with an average of 96.5 in 2009, the index also shows it s harder to buy now than in the 2009 recession. This contrasts with house measures which suggest conditions have improved. The rising cost of essentials during 2011 has outweighed the effect of falling house prices and rising s on the ability to buy. to buy has deteriorated most in the East of England, East Midlands and London since The biggest improvements were in Northern Ireland and the North East. But the results also contain some encouraging news. Low interest rates mean that even with the squeeze on household, the debt-servicing burden has fallen to 2003 levels. In Q a first-time buyer repayment mortgage took up just 52% of ( after tax, National Insurance and spending on essential goods and services). At the peak of the market in 2007 this proportion was 84% and in 1990 it was as high as 123%. 1 A rise in the index implies a deterion in ability to buy

2 But rising living costs have prevented this improving further. Compared with the 2009 recession, the debt servicing burden, after taking tax and living costs into account, improved by 5.8%. Measures based on gross suggest it improved by 8.7%. Low interest rates and squeezed also mean that it will take a long time for a, but not as long as in Assuming that house prices stay still, grow at a modest annual rate of 2.5% and FTB can save 30% of, it would take three years a. In London it would take eleven months longer, but in the in the North East it would take just 29 months to save a. Fionnuala Earley, RBS Group UK Consumer Economist, continued: Traditional affordability measures only look at gross, but the RBS Index gives a more realistic approach by taking into account other essential calls on buyers s. It is particularly timely given the FSA s emphasis on the assessment of borrowers outgoings in its latest proposals on mortgage regulation. But it s also important at a time when inflation is putting such pressure on household budgets. It is a little surprising that even though house prices are falling and s have increased, FTBs are squeezed more now than they were during the 2009 recession. The rising cost of essential goods and services has eroded their. But low interest rates are still a tremendous help. A 90% loan for a first-time buyer would take up just 52% of available today compared with 84% at the market peak. This gives borrowers a much bigger financial cushion. But lower and low interest rates mean saving for a is still a hurdle. s have improved, but ability to buy is worse than 2009 First-time buyer house prices were 18% below their 2007 peak in Q Over the same period, gross increased by. The house price to (HPE) fell from 6.7 to 5 as a result, suggesting a big improvement in affordability. But in fact this hasn't happened. The rising cost of living has squeezed households and made their ability to buy to deteriorate FTB Price to Earnings and Q3 1989=100 gross after tax to buy A rise in the index means a fall in the ability to buy

3 The RBS FTB index has increased for three consecutive quarters. (A rise in the index signals deterion in the ability to buy.) In Q the index reached 98.6, up 2% from the 2009 average of 96.5 when the economy was in recession. In the year to Q3 2011, FTB house prices have fallen by 0.5% and after tax s have increased by 3.3%. But, spending on food, transport and utilities increased by 7%. The rising cost of essentials has outweighed the effect of falling house prices and rising s on the ability to buy. And this is even without taking account of other spending on clothing or even rent. Regional to buy has deteriorated most since 2009 in the East of England, East Midlands and London. In Northern Ireland and the North East it has improved. But this doesn't mean that these areas will see their housing markets recover rapidly. There are other factors, particularly the labour market, which have an effect. For example Northern Ireland saw the largest improvement in ability to buy in Q3 2011, but this region also has the UK s highest rate of labour market inactivity and an economy very dependent on the public sector. 20% 15% 5% 0% -5% - -15% -20% to buy Q % change from 2009 A rise in the index means a fall in the ability to buy Inflation The rate of change of prices is critical to the ability to buy High inflation is the cause of the recent deterion in ability to buy, but before the housing market peak, low inflation was an important factor in its improvement. In the decade to 2007 lower living costs meant FTB rose from 50% of gross to 55%. This, along with lower interest rates, made it easier for households to afford to take on and service debt and was a contributing factor to rising house prices up to But since 2009, general inflation has been increasing and the price of essential goods and services has been increasing more quickly. This has eroded FTB to 53% gross Price indexes 1989 = 100 CPI Food Transport Utilities

4 . The actual cost of living is crucial when FTB make calculations about what they can afford, especially in an uncertain economic environment. The squeeze on their is likely to be another factor hindering demand. The FSA s approach to affordability set out in the Market Review is also putting more emphasis on borrowers, rather than gross, s. Inflation is now beginning to fall and will do so faster when last year s VAT rise falls out of the calculations. This will help to improve the ability to buy, assuming still rise. But, if the cost of food transport and utilities continue to rise quickly, buyers will continue to feel the squeeze for longer, even if house prices continue to fall. Affordability Low interest rates mean mortgage affordability has improved to 2003 levels Continuing low mortgage rates mean that the ability to service mortgage debt has improved to 2003 levels. At current house prices and assuming a loan to value of 90%, mortgage payments took up about 52% of in Q This compares to 84% at the peak of the market in The impact of lower interest rates on mortgage affordability is brought home when comparing affordability now with the last major housing market cycle. In Q1 1990, when the bank rate was at almost 15%, a 90% loan took up over 123% of % 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% FTB mortgage payments as %, 90% LTV But again, rising living costs have prevented this improving further. Compared with the 2009 recession, the debt servicing burden after taking tax and living costs into account, improved by 5.8%. Traditional measures based on gross suggest it improved by 8.7% suggesting conditions are better than they actually are. The picture differs across the UK too. In London FTB mortgage payment still takes up 69% of, but in the regions in the North of England the proportion is close to 40%

5 How long for a? Deposits take longer out of in the South and the shortest time in the North to buy for first-time buyers isn t just about how much money they have spare to pay the mortgage. It is also about how long it takes a. prices change, as do growth and the amount of interest earned on savings. Each of these affects how long it will take FTBs the required amount. Assuming that house prices stay still, that grow at a modest 2.5% and that interest paid on savings is about 2%, it would take the average UK FTB three years a. And this is assuming they were paying no rent. FTB in London and the South East, unsurprisingly, would have for the longest at just under four years. FTB in the North, Scotland and Yorkshire and Humberside would be able their the fastest. It would take these first-time buyers around two and a half years a.

6 Regional Tables UK N East Q % % 35 Q % % 34 Q % % 31 Q % % 33 Q % % 31 Q % % 36 Q % % 34 Q % % 31 Q % % 29 Q % % 34 Q % % 29 N West Y & H Q % % 28 Q % % 29 Q % % 29 Q % % 29 Q % % 30 Q % % 30 Q % % 30 Q % % 31 Q % % 30 Q % % 31 Q % % 31 W Mids E Mids Q % % 34 Q % % 34 Q % % 34 Q % % 32 Q % % 36 Q % % 34 Q % % 34 Q % % 31 Q % % 32 Q % % 34 Q % % 34

7 Regional Tables cont East to Buy London Q % % 41 Q % % 44 Q % % 43 Q % % 48 Q % % 47 Q % % 45 Q % % 47 Q % % 42 Q % % 44 Q % % 46 Q % % 47 S East to Buy S West Q % % 43 Q % % 40 Q % % 43 Q % % 42 Q % % 44 Q % % 43 Q % % 42 Q % % 40 Q % % 45 Q % % 42 Q % % 39 Wales Scotland to Buy Q % % 29 Q % % 29 Q % % 34 Q % % 29 Q % % 29 Q % % 30 Q % % 30 Q % % 28 Q % % 29 Q % % 32 Q % % 31

8 Regional Tables cont Northern Ireland to save to Buy Q % 53 Q % 42 Q % 43 Q % 36 Q % 38 Q % 35 Q % 39 Q % 46 Q % 42 Q % 33 Q % 36

9 Notes for Editors Introducing the RBS Index We typically assess affordability, or ability to buy, by looking at the of house prices or mortgage payments to. These measures are useful, but they don t give us the whole picture. holds have other calls on their which affect their ability to buy houses. Changes in the price of goods and services affect the amount of money households have left out of which to pay mortgages or save for s. The RBS Index takes into account how the changing costs of essentials, in combination with changes in, house prices and tax and National Insurance affect available, or, left at the end of each month. This gives a more sensitive and realistic measure of households true ability to buy. The RBS release also tracks how long it will take first-time buyers for a. But by taking into account expected changes in house prices, interest rates and growth, this measure gives us a truer measure of how long it would take to raise a, without help from the Bank of Mum and Dad. The RBS release provides data at a UK level for the average buyer and also for first-time buyers. It also breaks the data down so we can look at the differences in each of the UK s countries and regions. In future releases we will look at specific factors which can affect the ability to buy of different groups e.g. the effect of student loan payments on first-time buyers; changes in taxation and national insurance etc. But in this first release we look at how real ability to buy has changed over time, for the UK as a whole and across each of the UK s main countries and regions Sources and methods 1. price data is from Lloyds Banking Group 2. Earnings are mean male full time from ASHE. This measure is closest to average household as measured in the Family Spending Survey. Data is updated annually from ASHE and quarterly from the Labour Force Survey. 3. First-time buyer s are based on the age group from ASHE. This assumes that this is the age group most likely to be saving and thinking about buying. This conflicts with the measured first-time buyer age form CML. This is because CML s measure defines a first-time buyer as someone without a property to sell. It therefore captures returning buyers or those choosing to rent their existing property, which is likely to skew the recorded age up. 4. Regional spending on essentials is sourced from the Family Spending Survey. First-time buyers expenditure is apportioned to the regions in the same proportion as all buyers. The amount of spending is updated using the separate ONS inflation indexes for food, transport and utilities. 5. Discretionary is arrived at by taking spending on food transport and utilities away from after tax and National Insurance 6. payments are arrived at using Bank of England data on quoted mortgage rates 7. The length of time a takes into account assumptions about house price growth, the amount of that can be saved, and the rate of interest paid on savings.

10 Disclaimer This material is published by The Royal Bank of Scotland plc ( RBS ) which is authorised and regulated by the Financial Services for the conduct of regulated activities in the UK. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives ( Securities ). It should not be reproduced or disclosed to any other person, without our prior consent. This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the RBS Group s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information. This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information. For more information please contact: Amy Pickerill RBS Press Office