12 February 2008 17:32
NEW figures from the Council of Mortgage Lenders (CML) this morning reveal the full scale of the problems feeding through in the housing market. As the credit crunch hit, the number of first-time buyers fell 22% on a year earlier in the fourth quarter of 2007 and they were stretching themselves more than at any time since the peak of the last boom.
Mortgage interest payments accounted for 20.6% of the average first-time buyers' income, up from 17.7% at the end of 2006. The only time mortgages have been more unaffordable in the last 30 years was between 1989 and 1991, when boom tipped into recession. However, this is affecting house prices: the average price fell by a first-timer fell between the third and fourth quarters.
The decline in lending was even more marked looking at the monthly figures. The number of first-time buyers in December 2007 was 31% down on December 2006.
What happens next to interest rates will be crucial. The key difference between now and 1989-1991 is that interest rates are much lower. Despite the rate rises in 2007, the average first-time buyer's home was worth 3.36 times their income in 2007 compared to just 2.31 in 1989.
The CML sees recent rate cuts as reason for optimism and argues that the drop in lending has more to do with funding constraints than demand. However, this morning's rise in inflation suggests that scope for cuts in rates may be more limited than market optimists think. The 2.2% figure is above the Bank of England's target.
Posted by Jules Birch, Feb 12
Posted in Housing market, Interest rates