My brother sent me an email headed “To bring back memories of the 80s and your first flat/property.” It included a link to the place where I bought my first property that showed a studio flat, like mine, for sale. “Offers Over £175,000” were being sought.
I responded “That’s a 600%+ price rise! I read that Nationwide now offer 5.5 x salary! You would need to be on £28,000 per annum and have a £21,000 deposit, plus money for any other costs. So daunting, but not impossible.”
A quick bit of research had shown me that the current rate for my first job might now pay £28,000 per annum and thereby could allow a £154,000 mortgage. In this case, to buy a starter home for a single person now would need a mortgage of 5.5 x salary and a deposit of 0.75 x salary based on that salary which was close to the average. It looks to me like the increase in salary plus the increase in the mortgage multiple since the 1980’s has allowed this house price rise to happen. The higher multiple is possible because of lower interest rates today. Are more expensive houses the result of money being cheap? Will we see cheaper houses without seeing more expensive money first?
Browsing online today I see that Politics for all have tweeted on 12 May:
NEW: UK average house prices compared to average salary
House building House Prices / Salary
1970: £4000 / £1000
1980: £20,000 / £4000
1990: £60,000 / £10,000
2000: £85,000 / £16,000
2010: £170,000 / £23,000
2020: £230,000 / £28,000
Today: £260,000 / £30,000
The ensuing debate mentioned:
• interest rates being higher in the earlier years and lower now
• London and regional differences in house prices and salaries
• mostly single earners in the earlier years but now two earners
• the deposit size is the bigger hurdle now
• the accuracy of the average salary or whether a median or mode should be used
My starting salary and first (and second) property price in the mid-1980’s sit between the 1980 and 1990 figures in that table.
Back then in the mid-1980’s I had borrowed just under 3.0 x salary and put down a deposit of just over 0.5 x salary. In my early 20’s I was on a reasonably good starting salary that was below the average salary but I was confident that it would rise. I made sure to borrow less than 85% of the property value so I didn’t have to pay mortgage indemnity insurance that would have only benefited the lender. I had some money I had inherited at ages 18 and 21 and my parents topped that up so I had enough for the deposit. Without that help I would have needed a 90% to 95% mortgage and a multiple of 3.0 to 3.25 x salary. That would have been possible but more difficult to arrange at that time.
Back then mortgage interest was 12% but had increased to 14% before I even moved in. Mine was a new build so the builders gave buyers a little money back in response to the interest rate rise to encourage us to go ahead. The interest rate meant that I was spending about 40% of my take-home pay on the mortgage. That percentage fell as my pay increased. I owned that flat for three years and only paid back 1.5% of the mortgage advance. Putting it another way about 95% of my payments were interest.
My attitude then, just a few weeks into my first job, was that if I could do this then I should do it. Property prices were rising fast so the opportunity might be lost. I don’t remember thinking much about the risk of interest rates rising. The idea of the property price falling below the value of the mortgage and being in negative equity was unknown to me then. I also didn’t think about the possibility of losing my job or wanting to relocate. I was young, naïve but optimistic.
If I was in my early 20’s and in my first job now I’m not sure what I would do. If I could buy a property, should I? I suspect that my starting salary now in 2021 would be below the average rate for the job according to my Google search so I wouldn’t be able to move so quickly. I would maybe need to work for a couple of years. That would have given me more time to consider the situation. I think there is more information available now, via the internet, so I could be more informed about the issues. I could consider whether prices are at a high, and whether interest rates are at a low. Would I consider the impact of a possible change of circumstances such as losing my job, or wanting to relocate? Would I consider the risk of being trapped at the bottom of the housing ladder? I could be less young and less naïve but how optimistic would I be? I was optimistic back in the mid-1980’s despite being unemployed after graduating and struggling to get that first job!
Buying a first property because I could do it worked out OK for me back then, but I only realised how risky that was long after the event. Now I suspect that more time and more information would make me more cautious.