Why Homebuyers Can Afford To Be Patient

By Neil Faulkner | 19 April 2008

Using data for the past 25 years, house prices increase, on average (i.e. it does vary by property and region), by 8% per year. However, salaries increase by, perhaps, just 3% per year.

So it's not surprising then that many renters are desperate to buy a property, yet find it so hard to do so.

True, property prices have slumped a little in the past six months. No one can know what will happen over the next six. But I intend to show you why you can afford to be patient even when prices are rising.

Your deposit helps

To start with, you can grow the size of your deposit faster than house prices grow. This helps to partially offset the fact that your salary is not keeping pace with house prices.

Here's an example. Let's start by taking the average price that first-time buyers pay. Nationwide and Halifax's house-price data combined shows an average figure of about £150,000. However, I want to take a more pessimistic figure to emphasise my point. Let's say it's £160,000.

Now let's say you're determined to get on the ladder, so you're budgeting well and therefore saving £500pm towards a deposit.

At the end of year one you have a £6,000 deposit. House prices, on average, will have risen 8%, so they have gone from £160,000 to about £173,000. This means you now have a 3.5% deposit for your property.

After year two, the average property is worth £187,000, but you now have a deposit of £12,000, or 6.5%. As it's more than 5%, this is enough to start comparing mortgage prices (now that 100% mortgages with no deposit have been withdrawn).

You could continue this on for four more years: you save £500pm/£6,000pa, whilst house prices go up by the average of 8%. In four years, first-time-buyer prices are now around £218,000. But you also have a deposit of £24,000, which is 11%.

So, because you're putting a healthy-sized sum aside every month, your deposit is gaining. This is despite the fact that property prices are going up quickly.

The added bonus to having a bigger deposit is that, if you need to sell your home in a hurry, you're more likely to be able to do so.

Your salary

Of course, your salary goes up more slowly than house prices. Even so, along with your increasing deposit, an average increase (roughly) of about 3% per year still helps to get you a property you can actually afford.

I'm going to assume you're buying with someone else, because that is more common. Buying on your own is simply out of the affordable reach of too many people.

Average combined household salaries are, at present, a little over £46,000 (according to a report by Fool's Head of Personal Finance, David Kuo). This will give you a salary multiple of 3.5 times earnings today for a property worth £160,000.

But in two years you might expect the property prices to creep up to 3.6 times earnings and in four to 3.7 times.

So, yes, the prices are steadily getting worse, despite your efforts with the deposit.

Swings and roundabouts

However, if you have no deposit at all, you simply won't get a mortgage these days. Furthermore, if you have just a little deposit, you'll be offered abysmal deals. Whereas, if you have a big deposit, you'll have access to a lot more deals and therefore you're much more likely to get a better one.

Mortgage deals available depending on your deposit size

	Deposit (%)	Salary multiple	Mortgages available?	Choice of lenders
Year zero	0	3.5	None	None
Year two	6.5	3.6	Around 40	A handful
Year four	11.0	3.7	Around 80	Around 25

So, although your salary multiple goes up slowly over time, you will likely pay less in interest and charges because there is more competition for your business. These cheaper mortgages should offset the small difference in the salary multiple.

What if you already have a deposit?

Let's say that right now you already have a 10% deposit, so that is £16,000 on a £160,000 mortgage. Your salary multiple now is just 3.1. However, should you save £500pm for a little over five more years you would have a 20% deposit (always assuming house prices in your area grow at an average 8%).

Your salary multiple will have risen to 3.5, but you also have around 180 mortgages to choose from. That's more than double what's on offer now, so you can expect to get far better deals.

An aside...

Mortgages have been rapidly disappearing from the market recently, so it's harder to get a good deal. But if lenders start lending more responsibly, they'll be able to offer more loans again in the future. That will mean you'll have even more deals to choose from.

Also, you may have noticed that house prices in many areas have fallen this year. House prices have risen well above the long-term average of 8% over the past five to ten years, which likely helps to explain the recent declines. With a little luck, first-time buyers will see them fall further before they revert to the long-term average of 8% again.

But I don't want to go down the ugly road of predicting short-term prices, so I'll leave those thoughts there...

Affordability

It's all very well looking at salary multiples, but what's important is how much the deal actually costs you in fees and monthly repayments, and also the total cost over the length of the deal.

Remember that 'affordability' means that you can afford the initial repayments, but it also means you could afford the repayments if interest rates went up one or two percentage points.

Also, you have to look at your own expenses. in particular, consider if you can afford the additional costs of being a homeowner, e.g. maintenance and additional insurances?

Still, if you're paying between three and four times your salary and saving £500pm, buying should be affordable for many or most of you.

Conclusion

After reading the above you may be thinking 'If it's swings and roundabouts, then it doesn't matter whether I buy now or later.' Yes it does matter!

The point is, you don't have to rush onto the market. You can take some time to improve your finances. You can take your time to find the right property at a bargain price, whether that shows up in one year or four. You don't have to buy the first property you see at the listed price.

Of course, you can't expect the market to go up smoothly at 8% every year. Sometimes it'll go up faster. But we can expect that at some points the market will slow or even reverse, as it has done over the past six months. Furthermore, that dream, bargain property that you've waited for patiently and negotiated for cleverly hasn't gone up at the average rate, has it?

I believe that anyone can eventually get onto the ladder. The trick is to keep saving that deposit (even if for a while you can just afford £50pm to £100pm). Keep an eye on the market, and particularly on properties in the areas you'd like to live in. Be patient. Eventually, everything will come together: the price of the house you want, your salary, your other debts and the size of your deposit.

> Compare mortgage deals. Use our full search tables and sort the results by 'True Cost Over Chosen Period' to put the cheapest deal (including fees and charges) on top of the table.

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool.

At 20:18 on April 19 2008, MonsterMixer said:

The author begins the article with:

"Using data for the past 25 years, house prices increase, on average (i.e. it does vary by property and region), by 8% per year. However, salaries increase by, perhaps, just 3% per year"

This is untrue. Average salaries have risen approximately fourfold since 1983, which gives an average salary rise over the period of just under 6%. This makes the rest of the article incorrect. Average household salaries were also stated by the author to be £46000 - the true figure is estimated at around £30k. You can look up these kind of statistics at statistics.gov.uk.

Also, may I point out that the long term average for either index is a waste of time unless you adjust for inflation; the only numbers that count are real increases.

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At 13:05 on April 20 2008, figurewizard said:

MonsterMixer has touched on the very point that renders this advice futile when he mentions inflation. This is a tax on savings and despite what the government and the Bank of England are telling you, the real rate of inflation is more like 6% and rising. One of the explanations for this is because mortgage costs, which are actually rising, are not included in the CPI. Another is that the principle of weighting is applied, which assumes that whenever a particular product rises sharply in price, people will switch to a cheaper alternative: Think steak; mince; dog meat.

The only saving grace, if you can call it that is that inflation not only destroys savings; it also destroys debt. Once it has been sufficiently high for sufficiently long the housing market will be in a position to recover. So much for prudence!

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At 14:08 on April 20 2008, TMFVertigo said:

I have a habit of erring on the cautious/pessimistic side in my articles when it comes to predictions of the future. By using an example closer to a worst-case scenario, I don't set people's expectations at a level where they think they can easily buy a house when they want (or that they can get out of debt or get rich with ease, or whatever I happen to be writing about).

In this particular article, I have no problem with the fact I took a pesimistic view of first-time buyer house prices (i.e. I deliberately picked a high figure, which is further from an FTB's ability to buy).

Similarly, I used a low average payrise. Where I did err was in not making that clear: I thought using the wording that salaries rise by 'perhaps, 3%' would be sufficient. I knew it was low, but didn't even look up what the average was. To me, for this article, so long as it was a cautious estimate, it didn't matter too much what figure I used.

So I think it's easy to be unnecessarily harsh on this point. If I'd picked an optimistic figure for salary increases, like 8%pa, that would certainly be worth criticising. But, by setting an almost worst-case scenario, it actually makes the point of my article even more meaningful. It means that FTBs are even more likely than I hypothesised to be able to afford a property in the future, so long as they keep building their deposit.

You make the point of inflation but, on average and over time, we can expect salaries and prices (including property prices) all to rise. Your comments make the article much more complicated than necessary for the FTB who incorrectly thinks he/she needs to rush on to the market now. (And that is who this article was targeting.)

Even so, your comments will prove interesting to other Fools who are more interested in the theory, so thanks for them!

Neil (the author)

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At 16:35 on April 20 2008, steeve139 said:

This analysis does not take into account the money wasted on rent while saving for a deposit - shame that.

This analysis does not take a long term view - if house prices are rising more each year than your deposit is, then you are falling behind, because when you do take out a mortgage, it will be for more, AND you will have fewer working years left to pay it off. This is the traditional reason why first time buyers are rushed into decisions.

This analysis is based on house prices rising, which is clearly what they are not doing at the moment - on average.

This analysis is based on the current, somewhat weird, state of the mortgage market. I cannot remember it being like this for the last 25 years. Lenders and borrowers both need to know that there is nothing wrong with a 100% mortgage as long as the borrower can prove adequate income. We dealt with negative equity last time, and we can do it again. The lenders need to lend to make a profit. Brown needs popularity, maybe the mortgage market can be oiled and get back to normality, who knows?

If the average £200k house falls by 1% per month, that is £2k per month. As long as you are paying less than £2k per month rent, just sit tight, save, but be ready to pounce when you think the market has hit bottom. House prices tend to fall slowly, but can rise alarmingly quickly.

Houses are over-priced still, let us hope that now we will get the correction we so sorely need. Good Luck.

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At 23:48 on April 20 2008, castath said:

This article is far too general.

I can borrow £25k over 5 years at approx £500 per month. So I can buy an house now at £160k with £25k deposit or wait 4 years to save a £24k deposit and buy an house at £218k. Obviously you would have to apply for a mortgage then the loan to fund the deposit.

The question is what is the current living situation of the person/s saving £500 per month?

To me the question on whether to buy an house has always been rent v interest payable on actual house value (not mortgage). Is the difference worth it to you to make you purchase the house. Obviously you need to ensure you can fund the repayment part and for security it would make sense to hedge a long term fixed rate.

The more you stretch yourself the more of a gamble you are taking.

Also never underestimate the power of inflation over the medium to long term. I am not saying we will never have deflation and that will hurt, only that inflation erodes your debt, all you have to do is to make sure you can finance it during the difficult early years.

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At 10:21 on April 21 2008, philc73 said:

I think there is a major failing in this piece which homebuyers should be aware of before following this strategy. Every year that you follow it and save for the deposit, the average house price is increasing faster than you can save, meaning that your potential mortgage will grow each year. The article fails to mention that the mortgage size in at the start would be £160000, after 1 year £167000, 2 years £175000 and 4 years £194000. It would surely be a false economy to sit on that cash and accrue an ever larger debt? I agree with Neil's point that no deposit, or one of less than 5%, means you get a poor mortgage deal, but once you have 5% the market becomes much more friendly and personally I see far more sense in making the purchase then. I agree with Steeve139, the analysis does not take account of rent, which I see as being another reason to purchase earlier rather than later.

Finally, MonsterMixer, I think the average household salary referred to is the joint income, not individual salary, which as you say is closer to the £30000 mark.

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At 14:02 on April 21 2008, eightwayliz said:

If you save £500 per month for 4 years, you won't just have £24,000 at the end. You will have put in £24,000 (the total of the payments) but compound interest will have grown the pot by at least another £2000.

Also, salary multiples are multiples not percentages - so it's just "3.1" or "3.5", not 3.1% or 3.5%

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At 14:42 on April 21 2008, ricanold said:

I don't always open Fool e-mails, just when a topic catches my eye, and I have to say this peculiar logic of watching your potential indebtedness grow while you work all the hours you can and deny yourself any luxuries available,is not going to have me waiting with anticipation on the next financial gem to drop in.

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At 14:50 on April 21 2008, wesleyw said:

HELLO!!!
Sorry to shout but can I just ask why we must keep pushing 'bias headlines' such as the very one in this article?
You have not pointed out that in this example, if the buyer had entered the property market at the first stage, at £160,000 then by year four in your example they would have made £58,000 in equity at the property! Surely this example would be more interesting to buyers than tip toeing around saving pennies and paying for someone elses profit because they had the foresight to buy instead?
I would apprieciate your respone! Please!
Kind regards
Wesley

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At 14:51 on April 21 2008, DAQ80 said:

I think at the moment, it's probably sage advice, and it's worth bearing in mind that any assumption with this sort of thing must be heavily caveated. In actual fact house price inflation is far more volatile than wage inflation and there are plenty of times where it makes no sense to wait. However there is currently a huge difference between the cost of a mortgage and renting and it's possible to rent a similar property to the one you intend on buying whilst saving plenty of cash in the meantime (and waiting to see what happens to prices). At present with sensible savings and a decent choice of ISA you won't have to live like a monk and should be able to buy in the near future.

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At 15:39 on April 21 2008, wesleyw said:

Hello DAQ80,

I appreciate your comments. However, allot of people currently renting might disagree that you can afford to both rent and save at this time. Especially as rent (certainly in the South West) is quite comparable to an interest only mortgage in the three bed terrace category. Interesting times!
Wesley

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At 16:03 on April 21 2008, Bazman76 said:

Just to add to Steve139. He said that so long as houses are falling at a rate of 1% and you are paying less than £2k a year to live in such a property then you should sit tight I agree but the situation is actually even better for the renter.

You must remember the funding cost (i.e. mortgage). If house prices go up 10% but you are paying 5% mortgage then you only made 5%. If they do down 10% then you lost 15%! So even given a realtively small drop in prices gains over the last three years would be wiped out.

Similarly if they drop 1% then the owner is actually loosing 6%!! Even if you take into account rental income the situation is not much better. The rent I currently get would only cover a mortage on about two thirds of what estate eagents try and tell me my property is worth.

At the end of the day have got to consider that leverage works in both directions and what felt so good on the way up will surely hurt on the way down.

By any measure house prices have grown well above wage and indeed GDP this is clearly unsustainable and will undoubtedlt lead to a correction sooner or later.

Althought he goverment is trying to intervene their is little thay can really so. The prices have been a global phemomenon as is the credit crunch. They may be able to offer a little relief for fixed rate investors but i don't think even they want to see a return to 125% mortgages with no deposit.

Thus seriously overpriced assets and contracting credit = lower prices. It's ahrd to come to any other conclusion.

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At 16:10 on April 21 2008, Bazman76 said:

sorry just to add. to philc73 ricanold.

You are right that if prices are rising then it makes sense to buy, but equally if prices are falling then it does not make sense to buy.

Currently prices are dropping and all leading indicators like mortgage approvals indicate that they are likely top fall further?

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At 18:18 on April 21 2008, TMFVertigo said:

Thanks for all your comments, folks.

Philc73, you’re quite right that for completeness I should have included the actual figures that the mortgage will increase by. That was terribly absentminded of me. However, it doesn’t change the salary multiples, which was the important bit.

eightwayliz, I have removed the % signs in the two places where I (again absentmindedly) put them. Thanks.

Overall, this is far from my best-written piece, as it has clearly been misunderstood. The point isn’t about renting vs. buying. As I've written before: clearly buying makes more sense (if you can afford it and it suits your lifestyle choices). The point also isn’t that you should definitely wait. The point to the article is that first-time buyers shouldn’t feel it’s necessary to rush headlong onto the market. There is plenty of breathing room if you can’t find a bargain house or the house you want, so long as you keep saving money. If you need to improve your finances, you can do so rather than trying to buy something you can’t afford. The article is also about how you should always keep an eye on the market, so that you’re ready to buy the moment you see the right property when your finances are right too. All of this is stated in my conclusion, if you’ll take the chance to re-read it, but sadly the points seem to have got lost from all your posts. That’s my mistake in the quality of my writing, not yours. I shall learn from this for next time.

My last paragraph also answers your point, wesleyw, about growing equity in the property. If you’re buying something you don’t really want, can’t afford, or isn’t a fair price, it’s not really sensible. A home is a home first, after all, not an investment.

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At 18:20 on April 21 2008, TMFVertigo said:

Ah, I should have signed off that comment like this:

Neil Faulkner (the article's author)

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At 18:22 on April 21 2008, TMFVertigo said:

Hang on philc73, I DID put those figures in the article! I just re-read it...They're not in the table, but they are in the article body.

I thought I wasn't THAT absentminded.

Neil

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At 23:24 on April 21 2008, Strebor19 said:

I think this article is a clear example of why you should beg or steal the money for a deposit as soon as possible to get on the housing ladder. If you are paying £800 rent and you can also afford to save £500 a month, then in this example whilst you have been messing about for 4 years trying to scrap together a decent deposit, you have wasted toward £40000 in rent, and missed out on £58000 capital growth on the property, not to mention in 4 years in the example you would have also payed back at least another £10000 on the capital borrowed. So thanks motley fool for that advice on how to be £100000 worse of in 4 years !!!!!!

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At 21:05 on April 22 2008, LastChip said:

I can't believe that a site that claims to be "Seriously good with money" can allow such rubbish.

To take Neil's own example; we start with a base property value of £160,000, which after scrimping and saving for a years deposit (£6,000) is now £173,000. Even if you could get a mortgage with that deposit (which you currently can't), you would be servicing a mortgage debt of £167,000.

But, by waiting a further year, we now have a deposit of £12,000 and a property value of £187,000. Now we're in business with a deposit of about 6.4%; we jump in and buy the property and service a mortgage debt of £175,000.

Now, I think the last part should have read four years (not four more) as when I went to school 24000/6000=4! That aside, having now achieved a whopping £24,000 deposit, the property has risen to £218,000, hence, a mortgage debt of £194,000.

So by waiting from the end of year two (the first practical time we could buy) to the end of year four, we've saved an extra £12,000, but our mortgage debt has increased by £19,000 and we've (presumably) lined someone else's pocket by paying rent for an extra two years. SERIOUSLY GOOD ADVICE!

And that's not even accounting for Strebor19's point about capital appreciation.

Have you never heard of gearing? This is a classical example of it and an excellent article on why you should buy as soon as it is affordable.

For goodness sake, people believe what you guy's write. At least make an attempt to make it accurate .

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At 06:58 on April 23 2008, msmoneywise2102 said:

I have always been against renting, because rents are comparable with even today's higher mortgage payments. My household income (being sole earner) is £19k, but I bought even when most of my friends advised me I could not afford to do so, and have been managing my finances, putting my son through college and even saving for a rainy day. None of this could have been possible had I rented. My rent would have been money in someone else's pockets. At least now I have my home, some equity and peace of mind. Statistics are just numbers. If you have a deposit and do your sums, buy as soon as you can. Get a mortgage that is your best option right now. Yes, house prices may fall. But they will eventually rise. And should you need it, then you have a better negotiating position to get a loan than if you are a tenant.

I am a great fan of the Fool, but in this case I must disagree. I would like to point out that my employer, the same Government that churns out these statistics, pays us well below the average UK wage and our pay rise is going to be around 1.95%. But my home is mine (or rather mine and the Halifax's!) and that helps me sleep better at night.

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At 21:31 on April 24 2008, Zweiblumen said:

No wonder the housing market is so inflated when even so many hardened Fools are getting their sums so badly wrong. wesleyw, strebor19 and steeve139 are protesting loudly about the money "wasted" on rent, but are completely silent on the money "wasted" on mortgage interest if you do buy.

I am renting at the moment, but I am only spending at most £200 more than mortgage interest per month. In a falling market, that's hardly a sacrifice at all!

And in return, I have an appreciating asset, namely a deposit in high-interest savings account, rather than a depreciating asset (a home) and similar or greater outgoings!

Home ownership is good, but not at any price.

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At 08:09 on April 25 2008, sstudent said:

I would very much like to buy & have a nice deposit to start me off. However given the way things are at the moment I won't be bothering. I am quite happy to rent & keep building my deposit, then shop around a for a good deal later on when all this panic & nonsense is over.

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Beta

Why Homebuyers Can Afford To Be Patient

Your deposit helps

Your salary

Swings and roundabouts

Mortgage deals available depending on your deposit size

What if you already have a deposit?

An aside...

Affordability

Conclusion

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