Halifax recently reported that homes in nine out of ten UK towns were now 'unaffordable' for first-time buyers. Certainly first-time buyers are now only taking less than three in ten mortgages and have fallen well below the long-term average of almost one in two. But beneath these headline-grabbing figures there may be some light at the end of the tunnel.

Halifax believes that affordability ratios will decrease in 2005 making it easier for first-time buyers to enter the market. Their First Time Buyer Annual Review 2005 is too large to be re-printed fully in a news item, but here in Viewpoints we can provide more coverage.

The first-time buyer review tracks housing affordability, and associated issues specific to those buying their first home. The review is compiled using information sourced from the Halifax's own extensive housing statistics database, Council of Mortgage Lenders and the Office of National Statistics.

Halifax is the UK's largest mortgages and savings provider and also publishes the longest running monthly house price index in the UK.

The key findings of the Halifax Annual First Time Buyer Review are:

First-time buyers accounted for less than three in ten of all new mortgages in 2004. This was well below the longer-term average of almost one in two.

The affordability difficulties confronting first-time buyers have significantly reduced the number of first-time buyers entering the market. There were an estimated total of 361,000 first-time buyers in 2004, the lowest annual total since 1981. The number of first-time buyers last year was almost a third lower than in 2002 (532,000).

The average price paid by first-time buyers increased by 16 per cent in 2004 from £112,541 in 2003 to £131,024. First-time buyers in the North and Wales experienced the biggest price rises in 2004 with increases of 27% and 25% respectively.

Nine out of ten of the post towns surveyed were unaffordable for first-time buyers in 2004. There were some regional differences. In four regions – East Anglia, the South West, South East and the North – the survey found that 95 per cent or more towns were unaffordable for first-time buyers. On the other hand, 19% of the towns surveyed in Scotland and 25% in Northern Ireland were affordable.

To work out 'affordability' Halifax first calculated the UK average house price to UK average earning ratio then compared that against the same calculation for the towns concerned. Actually, they then multiplied the P/I ratio by 4.37 to give a 'borrowing capacity' and compared this to the average price of a house in the town.
This method means that towns are classified as either affordable or not-affordable whereas in fact people with a range of P/I ratios buy houses at a range of prices.

There has been a significant increase in the number of towns that are unaffordable for first-time buyers outside southern England since 2002. The proportion of towns in the North unaffordable for a typical first-time buyer has risen from 54% in 2002 to 95% in 2004. There have also been marked increases in Yorkshire and the Humber (72% to 92%), the North West (67% to 88%), Scotland (57% to 81%) and Wales (62% to 86%) over the past two years.

The least affordable town for a first-time buyer in the UK is Gerrards Cross in Buckinghamshire where the average property price is 18 times the average income of a first-time buyer. All 10 of the least affordable towns are in London and the South East with the exceptions of Knutsford and Altrincham in Cheshire and Ilkley in Yorkshire.

Lochgelly in Scotland is the most affordable town in the UK for a first-time buyer with an average property price three times higher than a first-time buyer's average income. 8 of the 10 most affordable towns are outside the south of England. Erith in Greater London and Gosport in Hampshire are the two exceptions.

First-time buyers put down an average deposit of £26,455 in 2004. This accounted, on average, for 20% of the value of the property. Regionally, the average deposit varied from £48,364 in Greater London to £13,366 in Northern Ireland. The equity put into a first home was significantly higher than in the late 1980s with first-time buyers putting down a deposit equivalent to 12% of the property value in 1989.

The average age of someone buying his or her first home has risen in recent years with the average age of a first-time buyer in 2004 being 34 years. This compares with an average age of 32 in 1999. Scotland has the oldest first-time buyers (average age of 37 years). The proportion of those aged 25 and under buying their first home remains low, at just 16 per cent of first-time buyer home purchases. This is almost half the proportion in 1988 when 31% of first-time buyers were under 25.

More than seven in every ten properties purchased by first-time buyers in 2004 were terraces (43%) and flats and maisonettes (28%). Detached homes and bungalows accounted for only 7% of all purchases by first-time buyers.

The proportion of first-time buyers is likely to increase from its current record low during the next few years. Earnings growth is set to outstrip house price growth in 2005 and over the medium-term. This will cause a reduction in the ratio of house prices to earnings, which will begin to make it easier for first-time buyers to enter the market.

The average first-time buyer now pays over £1,300 in stamp duty, equivalent to around 5% of their deposit or nearly two and a half weeks of their gross annual income. More and more first-time buyers are falling into the stamp duty net because the government has declined to index link the £60,000 threshold. The threshold has remained unchanged since 1993.

Halifax will launch a campaign to persuade the government to reform stamp duty on residential property. Halifax would like to see the government raise the £60,000 stamp duty threshold to allow for the rise in house prices since it was last increased in 1993 and to commit to increasing the thresholds in line with house price inflation in the future.

Martin Ellis, Chief Economist, commented: “Affordability has become a serious issue making it very difficult for those looking to get onto the housing ladder for the first time. This is highlighted by the sharp decline in the number of first-time buyers over the past two years to the lowest level since 1981."

"There is some light at the end of the tunnel, however. We expect the situation to improve somewhat as earnings growth outstrips house price growth over the next few years. This will make it easier for first-time buyers, thereby boosting the number from its current historically very low level.

First-time buyers accounted for less than three in ten of all new mortgages in 2004. This was well below the longer-term average of almost one in two.

First-time buyers account for a smaller proportion of all house purchasers in the South West (22%). At the other end of the spectrum, first-time buyers account for the largest proportion of homebuyers in Greater London (41%). Whilst the proportion is highest in the capital, it has nonetheless declined significantly over the past two years (2002: 47%).

Nationally, the average deposit put down by a first-time buyer was £26,455 in 2004. This represented 20% of the property's value compared to 18% (£19,999) in 2003. First-time buyers have been putting more equity into their homes than in the late 1980s. At the height of the late 1980s boom, in 1989, first-time buyers put down a deposit accounting for 12% of the property's value.

The largest deposits are made by first-time buyers in the highest priced regions: Greater London (£48,364), the South East (£34,995) and the South West (£31,277).

Although deposits are lower elsewhere – with the lowest in Northern Ireland (£13,366) and Scotland (£14,568) – there has been a substantial increase in the amount put down since 2002 in all regions. The biggest percentage increase in the deposit made by a first-time buyer between 2002 and 2004 was in the North (157%), followed by Wales (103%).

First-time buyers are continuing to delay the purchase of their first home. The average age of a first-time buyer is now 34. This compares with 32 in 1999 and is the same as in 1989.

Scotland is home to the oldest first-time buyers (average age: 37 years). The youngest first-time buyers are in the South East, East Anglia and the East Midlands (all 33 years old).

The increase in the average age of first-time buyers in recent years is partly attributable to the sharp rise in house prices. A number of other factors are also responsible. For example, younger people are spending longer periods in higher education and entering the labour market later. This development, combined with a greater supply and quality of rental properties and the requirement for greater geographic mobility in the labour market, has driven up the average age of the first-time buyer.

The proportion of first-time buyers who are aged 25 years and under was unchanged in 2004 compared to 2003, accounting for 16 per cent of all first-time buyer home purchases in the UK. This is almost half the proportion in 1988 when 31% of first-time buyers were under 25.

There are notable regional differences. For example, in Greater London, first-time buyers aged 25 years and under account for just 9 per cent of all first-time buyer home purchases. At the opposite end of the scale, 21 per cent of first-time buyers in East Anglia are in the 25 years and under age bracket.

More than seven in every ten properties purchased by first-time buyers in 2004 were terraces (43%) and flats and maisonettes (28%). Detached homes and bungalows accounted for only 7% of all purchases by first-time buyers.

The highest percentage of flat and maisonette purchases by first-time buyers continues to be in London (60%) and Scotland (63%). The smallest percentage of sales of flats and maisonettes is in East Midlands (8%) and Yorkshire and the Humber (8%).

Two people buying together still remains the most popular way of buying a first home, accounting for 52 per cent of first-time buyer sales.

Single females represented 23% of all first-time buyers in 2004 - unchanged compared to 2003. There was a slight fall in the number of single males buying their first home as a proportion of all first-time buyers with this group accounting for 25% of all sales to first-time buyers in 2004.