New data produced this morning by the Nationwide suggests prospective first time buyers are having a tough time – and many are likely to have to remain renting.

The lender says 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 interest rate rises.

The building society says this actually began in late 2021 with typical five-year fixed rates starting to rise, reflecting expectations that the Bank of England would have to hike rates significantly in the years ahead to help bring inflation back to its target two per cent.

Nationwide’s senior economist Andrew Harvey says: “Mortgage rates surged after the mini-Budget in late September [2022] reaching their highest levels since 2010, over four times higher than the lows prevailing in 2021. 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.”

He says that the typical potential first time buyer – with an 80 per cent loan-to-value mortgage – would now have to spend 39 per cent of take-home (net) pay on mortgage servicing, which close to the levels seen in the run up to the 2008 financial crisis.

In addition, Harvey warns that raising a deposit is another major hurdle for prospective buyers. 

“In recent quarters, strong wage growth and a small fall in house prices has led to a modest fall in the house price to earnings ratio. But this has done little to improve the situation, as it follows several years when house price growth outpaced earnings by a wide margin.

“For example, between the start of the pandemic and the end of 2022, house prices increased by 19 per cent, while incomes rose by a much more modest nine per cent. At the end of 2022, the UK first time buyer house price to earnings ratio stood at 5.6, the same level as at the end of 2021.

“This in turn means that a 20 per cent deposit on a typical first time buyer home is now equivalent to 112 per cent of the pre-tax income of a typical full-time employee, a similar level to a year ago, and only modestly below the all-time high of 117 per cent recorded earlier in 2022.”

Harvey suggests that there may be some scope for affordability to improve a little in the year ahead. 

Longer-term interest rates, which underpin mortgage pricing, have fallen back towards the levels prevailing before the mini-Budget, and he suggests that if this is complemented by personal income growth (currently running at about seven per cent in the private sector) the position would be less bleak. 

“Nevertheless, the overall affordability situation looks set to remain challenging in the near term. 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. Moreover, 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 – especially since they also tend to spend a larger share of their income on housing costs than owners with a mortgage” concludes Harvey.