House deposits have hit an all-time high relative to people's earnings, with the average first-time buyer now putting down 110 per cent of their annual income to secure their home.
A 20 per cent deposit on a home now costs the equivalent of 110 per cent of the mean, pre-tax annual earnings of a full-time adult worker, according to building society Nationwide which is one of the UK's largest mortgage lenders.
This has increased from 102 per cent a year ago, it said, as house prices have risen at a faster rate than people's salaries.
A first-time buyer now has to save 110% of their annual income to put down a house deposit
House prices have increased dramatically in the past year, with Nationwide's last index reporting the typical house was worth £250,011 in September – a 9.9 per cent increase in just one year.
Meanwhile, the Office of National Statistics recorded underlying annual growth in wages as being between 3.6 per cent and 5.1 per cent in the three months to July 2021; the most recent figures available.
Increases in the house price to earnings ratio (HPER) are a particular problem for first-time buyers, as unlike home movers they cannot use the equity that has built up in their home to make up the bulk of their deposit.
Andrew Harvey, senior economist at Nationwide, said: 'One of the consequences of high house prices relative to earnings is that it makes raising a deposit a significant challenge for prospective first time buyers.'
Nationwide reported that, in the third quarter of this year, the typical house price for a first-time buyer was 5.5 times their income.
This was above the previous high of 5.4 in 2007, and well above the long-running average of 3.8.
Back in 1983 when Nationwide's index began, first-time buyers paid only 2.7 times their annual income for a home, and at one point in 1995 they were paying a record-low level of 2.1 per cent their annual income.
Proportional prices: Today, an average home costs 5.5 times the typical first-time buyer's salary – but 25 years ago that figure was as low as 2.1 times the annual income
However, the proportion of first-time buyers receiving help paying their deposit has only increased marginally in that time, going from 27 per cent 25 years ago to around a third today.
Managing director of estate agent Barrows and Forrester, James Forrester, said: 'Much has been made about the government's success in negotiating the pandemic where the property market is concerned.
'While it's fair to say the market has never looked stronger, this statement is one based largely on perspective.
'If you own a home and have enjoyed a double-digit increase in value over the last year, you're no doubt over the moon.
'However, those struggling to piece together a sufficient deposit are unlikely to share this opinion.
'The cold reality is that if you aren't looking to buy with the financial support of a second wage, support from the Bank of Mum and Dad, or you don't earn considerably more than the average person in your respective area, the dream of homeownership is one you're unlikely to realise until much later in life than you might like.'
Nationwide's research showed that some regions were more affordable than others, however.
London continued to have the highest house price to earnings ratio of any region, with the typical home costing nine times the average salary – although that was below its record high of 10.2 times salary in 2016.
Scotland, meanwhile, has the lowest house price to earnings ratio in the country at 3.4; closely followed by the North region at 3.5.
Nationwide also looked at the average time it would take someone earning the typical wage in each region to save a 20 per cent deposit towards an average first-time buyer property, assuming they set aside 15 per cent of their take-home pay each month.
Buyers in Scotland and the North could save a 20% deposit for a home in six years, while those in London could face a wait of 16 years. In the South West, it takes almost 11 years
In Scotland and the North, it would take around six years – while in London it would take almost a decade longer. Those in the South East and South West face around 11 years of saving.
Nationwide's research also looked at the cost of mortgage payments relative to wages.
Currently, first-time buyers pay around 31 per cent of their take-home pay on their mortgage.
This is not a huge difference compared to when Nationwide's index began in 1983, when first-time buyers paid just over 25 per cent of their earnings toward their mortgage.
However, in the mid-1990s they were paying as little as 15 per cent, and a year ago in the third quarter of 2020, just over 27 per cent.
Interest rates are currently very low in historical terms, which is good for first-time buyers taking out mortgages – but the fact that savings rates are equally low has meant it has been harder to get a deposit together.
Director of estate agent Benham and Reeves, Marc von Grundherr, said: 'Record low interest rates over such a prolonged period of time have been great for those taking their first step on the property ladder with a mortgage, but they've been terrible for those attempting to save.
'Unfortunately, there's not a great deal that can be done although the cyclical nature of the property market does suggest what goes up, will come down.
'So sitting tight and waiting for a correction is probably the best immediate bet open to struggling homebuyers.'
While it is still cheaper to service a mortgage than it was in the run-up to the financial crisis, Nationwide's Harvey admitted that mortgage affordability was 'becoming more challenging'.
He pointed out that the percentage of wages spent on servicing a typical mortgage was now above its long-run average in the majority of UK regions, while pre-pandemic it had only been the case in London.
'Recent price patterns suggest an element of rebalancing is occurring where most of the regions that have seen the strongest price growth are those in which affordability is still close to or below the long-run average,' he said.
Nationwide also looked at the impact impact a rise in interest rates might have on mortgage payments, and specifically the proportion of take-home pay that the typical mortgage would need to service.
Rate rises could mean marginal mortgage payment increases for first-time buyers
It has been speculated that the Bank of England could increase its base rate as early as December, which would have the effect of pushing the cost of a mortgage up.
It found that this would be relatively modest, especially given that the majority of mortgages are on variable rates.
If rates went up by 0.40 per cent the proportion of wages spent on the mortgage could increase from 31 to 32 per cent of take-home pay, or an extra £34 a month, Nationwide said.
However, if rates increased by 0.90 per cent this could increase by 34 per cent or £79 a month.
'Provided the economic recovery remains resilient, higher interest rates are likely to exert a moderating influence on the housing market, as well as dampening price pressures across the economy more generally,' Harvey said.
When Nationwide's index began in 1983, the average first-time buyer paid just over 25 per cent of their take-home pay to service their mortgage.
And those buying in the 1990s could expect to part with an even lower proportion of their yearly earnings, with the typical mortgage payment in early 1996 coming in at just over 15 per cent of their pay packet.