First-time buyers in London are now shelling out two-thirds of their take-home pay on monthly mortgage bills – the highest level for 33 years – data has revealed.
The figures from building society Nationwide show that people joining the property ladder in the capital at the end of 2022 could expect to hand over 67 per cent of their net income to their home-loan provider.
This is the highest level seen since the dark days of 1990, when Bank of England base rates were in the double digits and the economy entered recession.
In the final quarter of last year, first-time buyers saw the sharpest rise on record in the proportion of their earnings required to cover mortgages. The cost of borrowing soared in the wake of the disastrous mini-Budget held by then-chancellor Kwasi Kwarteng in September, while wage growth failed to keep pace.
The Nationwide data also revealed that first-time buyers typically paid more than nine times their gross annual salary to secure a London property in the final months of last year. This is well above both the long-run average in the capital and the latest UK-wide figure.
London’s most and least affordable boroughs
A Londoner setting aside 15 per cent of their wage packet every month would take 15 years on average to build up a 20 per cent deposit for their first home, according to the report.
Westminster replaced Kensington and Chelsea as the least affordable local authority area in which to buy a house in the UK. Looking at all buyers, the borough had a house price to earnings ratio of 15.6, meaning even a 10 per cent deposit was in excess of 18 months’ average gross salary.
Bromley remained the most affordable borough in the capital with a ratio of 7.4.
Separate data from property tech provider iPlace Global found that more than one in four London homeowners had looked at switching mortgage deals in the last six months due to affordability.
And figures from mortgage fintech provider Twenty7Tec showed that purchase mortgage searches were 41 per cent lower across the UK in December than the prior month. Searches dwindled from September to the end of the year in contrast with the usual rush of home buyer activity.
Tom Bill, head of UK residential research at estate agents Knight Frank, said first-time buyers were “squeezed” because they often had higher loan-to-value ratios than those higher up property chains and potentially earned less than those on their fourth or fifth home.
Recent hikes in interest rates meant monthly outgoings were rising by hundreds of pounds at a time when cost-of-living pressures were biting, he added.
“The message in 2023 is to stay close to your mortgage broker,” he said. “Affordability pressures are at their greatest in the capital. “
Although the market is currently “tough” for first-time buyers in London, the situation should start to ease, he said.
“Mortgage rates are coming down although it’s marginal compared to the extent they have risen. We are seeing downward pressure on prices already; we will see a gradual descent into 2024.”
Andrew Harvey, senior economist at Nationwide, added: “The biggest change in terms of housing affordability for potential buyers over the past year has been the rise in the cost of servicing the typical mortgage as a result of the increase in mortgage rates.”
Home loans were at their most expensive for over a decade in the final months of last year, he added.
“While wider financial market conditions had stabilised by the end of 2022, with market interest rates falling back towards the levels prevailing before the mini-Budget, mortgage rates are taking longer to normalise.” House affordability is “set to remain challenging”, Mr Harvey added.
“Saving for a deposit will still be a struggle for many. The cost of living is set to outpace earnings growth by a significant margin again this year, while labour market conditions are widely expected to weaken.
“Rents have also been rising at their strongest pace on record, which will be a further drag for those currently renting who are looking to buy a home.”
Simon Bath, chief executive of iPlace Global, said: “Younger homeowners are particularly vulnerable to the significant changes in the mortgage market that have occurred over the past 12 months, mainly because they are more likely to have stretched themselves to buy when prices were higher. To make matters worse, at this stage in their life, the younger generation are likely to have less savings to dip into.”
James Tucker, founder and chief executive of Twenty7tec, said: “The next 12 months are going to be full of challenges for advisers and lenders as they move to satisfy customers in challenging economic conditions.”
