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New data on affordability for first-time buyers


Published: 12 December 2016 | Author: Chris Walker, housing consultant and co-founder of the ChamberlainWalker economics consultancy

In his autumn statement, the new chancellor put more emphasis than we have heard before on building more homes to boost the nation’s flagging productivity levels, as well as the perennial problem of improving affordability. As the chancellor said: “The challenge of delivering the housing we so desperately need in the places where it is currently least affordable is not a new one…But the effect of unaffordable housing on our nation’s productivity makes it an urgent one.” A raft of new – and welcome – measures ensued. Now, we must wait to see what emerges from the housing white paper, expected early next year.

Before we consider that, however, the Office for National Statistics has just published some new data that has a bearing on my recently published paper for the CML Government Housing Schemes: Accident or Design? That report highlighted that the age of a first-time buyer matters. Although the earnings of those in their 30s are similar to those of other ages, the earnings of those in their 20s are significantly lower – by around 25% to 30%.

The new data commissioned by the CML from the Office for National Statistics annual survey of hours and earnings (ASHE), published last week, show the earnings of 22 to 39 year-olds were around 90% of average earnings in 2015 and were lower than average in 273 out of 300 local authorities for which there were sufficiently robust data. That looks set to reinforce a trend that is already clear from CML data – namely that affordability pressures are forcing more of this generation’s twenty-somethings, and maybe even those in their 30s, to delay the purchase of their first home.

The government's agenda

But, to return to the autumn statement, what did it tell us about the government’s position towards home-ownership? The linking of the housing and productivity agendas was not new. It continued the theme of the Fixing the Foundations  productivity document released by HM Treasury and the Department for Business, Innovation and Skills in the summer of 2015. So, did the autumn statement really signal a shift away from the emphasis on home-ownership, and towards just getting homes of any tenure built, wherever we need them most?

Many in housing circles had been speculating about the new government’s position on home-ownership, with a widely held belief that the stance would be more tenure-neutral. However, the new chancellor dispelled that somewhat. “For too many,” he said, “the goal of home-ownership remains out of reach.” It was a clear reference to young people – aspiring first-time buyers thwarted by spiralling house prices and a fall in relative wages.

Price-to-earnings ratio

My recent paper for the CML observed that the ratio of home prices to single earnings was in 2015 around 10:1 in the south of England and 15:1 in London in 2015. In other words, well out of the reach of many young people unless supported in some way by the government or by their parents.

The ratios are obviously lower when considered at the household level – and household composition matters when it comes to affordability. The paper found, for example, that based on an attainable house price to earnings ratio of 4:1, a single person without children on an average full-time wage could afford to buy a flat in 37% of English local authorities. A couple with children, both on an average full-time wage, could afford to buy at least a terraced home in 82% of local authorities.

Home-ownership in the UK has declined from 69.3% in 2002 to 63.1% in 2014 – a fall of 6.2 percentage points. Modelling by Oxford Economics for the recent Redfern Review into the Decline of Home-ownership found that the rise in real home prices accounted for 2.6 percentage points of that 6.2 percentage point fall.

The Redfern Review also highlighted that the average earnings of those aged 28 to 40 – the age bracket into which most first-time buyers fall – had been broadly comparable to the earnings of older people from the mid-1990s until the credit crunch. However, the earnings of this group had fallen by 10% relative to older people since. This, the modelling by Oxford Economics found, had contributed 1.4 percentage points of the 6.2 percentage point decline in home-ownership.

A double whammy

It is clear that young people have faced a double whammy in their aspirations for home-ownership: rising real house prices and a fall in their relative earnings. This has caused much of the decline in home-ownership, and is reflected in the relatively low number of first-time buyers.

So, how did the autumn statement affect the plethora of government home-ownership schemes intended to help them – the subject of my recently published research report? In the event, there was not much rowing back, as the chancellor proudly announced a large-scale regional pilot of Right to Buy for housing association tenants and continued support for deposit-lacking, affordability-challenged, younger people through the Help to Buy: equity loan scheme and the Help to Buy ISA.

There was, however, not much mention of support for shared ownership, the subject of another recently-published CML research report. Further, the government announced plans to relax restrictions on grants to allow a wider range of housing types.

More flexibility

This is a strong commitment to real flexibility in what housing associations can build and offer. It could mean that the sum of around £6 billion in the affordable homes programme (2017-2022) may now be used more flexibly than spending on shared ownership. Could this mean that the £4 billion for 135,000 shared ownership homes that the government announced in the last spending review in 2015 – or at least some of it – is now up in the air?

All in all, it is possible to detect a slight softening of the government’s position on home-ownership. “This commitment to housing delivery represents a step change in our ambition to increase the supply of homes for sale and for rent, to deliver a housing market that works for everyone,” the chancellor said. And ultimately, the autumn statement was good for housing.