Falling house prices are good news for potential first-time buyers, the Halifax review of housing affordability has stressed. There has been a big improvement in housing affordability over the last year.
Still expensive
House prices on average are 4.56 times average income in November 2008 - compared to 5.84 times average earnings in July 2007. But this still makes them expensive compared to the past - the historical average over the last 20 years has been four times earnings. The last time they were at a similar level of affordability to that in November was in July 2003.
First-time buyers could afford to purchase homes in three times more local authority areas in 2008 than the year before. The average price paid by first-time buyers was affordable to a person on average earnings in 14% of council areas during 2008, against just 4% of council areas in 2007. There are now 57 local authority areas in which an average property could be bought by someone on average earnings, out of over 400 council areas.
A similar picture can be seen on a regional basis. Affordability has improved in seven out of 12 UK regions during 2008. The biggest increases in affordability were in Yorkshire, the Humber and Scotland. But average properties remain unaffordable in all council areas in London, the South West, West Midlands, Wales and Northern Ireland.
'Trend should continue'
Martin Ellis, chief economist at Halifax, believes that first-time buyers will find increasing numbers of homes falling within their price range. "There has been a marked improvement in housing affordability in many parts of the UK," he says. "First-time buyers, in particular, are benefiting, especially outside the South of England and the Midlands. We expect this trend to continue in 2009."
Areas in which average homes have again become affordable to first-time buyers during 2008 include Sheffield, Kirklees (which covers Huddersfield and much of the Yorkshire Pennines), East Hertfordshire, Thanet, Rushcliffe (near Nottingham), Dundee and South Lanarkshire.
Unaffordability is most common
Despite the improvement in affordability, it remains the case that first-time buyers will typically not be able to afford to buy an average-priced home in most local authority areas. David Bexon, managing director of Smart New Homes, explains: "While it is welcome news that there has been an increase in the number of local authorities across the UK where property is more affordable for first time buyers, it still leaves 86% of local authorities unaffordable."
Not only this, argues Bexon, but mortgage lenders are failing to provide the types of deals that first-time buyers need. "For those first-time buyers lucky enough to have the almost universally required 25% deposit, they may be able to secure a reasonable mortgage rate.
"However, the majority of lenders are still penalising those at the bottom of the ladder by refusing to offer competitive rates and increase lending. Part of the deal of the Government bail-out was to see those banks benefiting from the £50 billion to return to 2007 lending levels, but this has yet to happen. It has been left to the UK’s house builders to offer the best opportunities to help homebuyers to get moving with thousands of deals available to help make home-buying more affordable and accessible."
Shared ownership or nothing
"The availability of affordable shared ownership schemes will be the only route for first-time buyers in those unaffordable regions, providing a low-risk route onto the property ladder while allowing buyers to gradually increase their share in the home over time," says Bexon.
A crisis in the supply of affordable housing is being worsened by the collapse of the construction industry, which is dramatically reducing the flow of new homes coming onto the market. This is exacerbated by many of the not-for-profit housing associations - funded by government to provide affordable homes - themselves hitting severe financial problems. This has been caused, in part, because of the failure of joint ventures with private sector property companies that were designed to build mixed-tenure developments. With a fall in demand for homes-for-purchase, it is in many cases no longer economically viable to build the homes-for-rent within the same developments.
Drop in new homes
Taken together, the inability of both the private sector and housing associations to provide the new homes they had planned means that the Government's target for new homes for 2008 has not been met, with possibly worse to come in 2009.
Research being conducted by Savills - to be published soon - is expected to conclude that as few as 50,000 new homes are likely to be built in England in 2009. This would be below even the levels of 2008 - some 85,000 homes are likely to have been constructed in the 2008/9 financial year, according to the National House Building Council.
These levels of new building are significantly below government targets of 240,000 new homes to be built per year, creating a total of 3 million new homes by 2020. Housing minister Margaret Beckett has said that this target will not be changed, despite the current economic pressures. Failure to press ahead on this, she said, would mean that "housing will become even more unaffordable" and "waiting lists will grow".
In a letter to the House of Commons Environmental Audit Committee - which had called for the target to be reduced in its early years - the Government's advisors, the National Planning and Advice Unit , reiterated the Government's commitment to meeting the targets, which it calls "supply ranges". Chairman Stephen Nickell pointed out that Kate Barker's review for the Treasury and the former Office of the Deputy Prime Minister of the housing market had concluded that in the last three decades of the 20th Century, the rate of increase in housing supply had fallen by 50%, while the rate of increase in the number of households had risen by 30%.
Nickell added that while existing supply ranges are "stretching", this does not mean they are "unachievable".
The risk is that despite falling house prices, the construction industry and the housing associations will remain unable for some time to achieve the Government's expectations for new house building, or to provide homes within the budgets for first-time buyers. And, as Savills has pointed out, even if house prices are falling at present, they will begin rising again at some point in the coming years. There is no short-term solution to the crisis of housing unaffordability.