Affordability Index - An uncertain future ahead for buyers

Higher property prices and a looming increase in interest rates are among the unpalatable realities faced by homeowners and prospective buyers in the immediate future.

As existing owners face an average mortgage increase of €40 monthly because of the inevitable hike the

European Central Bank (ECB) will sanction this week — probably in the order of 0.25% — it was revealed yesterday just how heavy the burden is on first-time house buyers.

The new Affordability Index by EBS Building Society and DKM Economic Consultants showed practically one-third of their income is outlaid on mortgages.

Depending on whether the first house is in Dublin or outside the capital, that outlay will range between and €1,300 and €1,700 a month.

That is the equivalent of mortgages costing 27% of earnings for first-time buyers nationally, and it is 5% more expensive for those who purchase in the capital.

This represents an overall increase of 3% on last year.

With first-time buyers’ properties already ranging in price from €292,000 to €388,000 in Dublin, it is hardly surprising that the index contains a warning on the affordability aspect, both for prospective buyers and lenders alike.

Considering that the interest rate which the ECB is expected to impose means another extra €168 annually for every €100,000 borrowed, the impact on earnings is considerable.

It becomes even more horrendous if it is considered that this month’s increase could be compounded by future hikes stretching into next year. Interest rates are not the sole factor that must be taken into account.

There are extraneous factors over which consumers have no control and which figure in already stressed household budgets.

Already between December 2005 and April 2006, the inflation rate has risen sharply, with consumer prices surging from 2.5% to a huge 3.8%.

So, the question of affordability will be a crucial one, especially in a climate where many people are reliant on 100% mortgages, and where unemployment would prove financially disastrous.

Despite the relative stability of the employment situation at the moment, it could be folly for anybody to presume a continuous source of income.

The first-time buyer market is an immensely important one, with those buyers expected to contribute in the region of €8.5 billion to the overall mortgage market this year.

In this same period, it is anticipated that 47,000 people will take out first-time mortgages, meaning that there is scope for potential financial difficulties if people overstretch, or inflate, their ability to meet obligations.

The types of properties in their market are already expensive, and the signs are that they are going to get even more so. Expectations should not be fuelled by lenders and financial institutions, and criteria have to be strictly adhered to if people are to avoid financial disasters.

That is why, as the index stressed, affordability has to be the key issue for many first-time buyers, particularly in a market that continues to boom and over which they are unable to exercise any influence.

And it is not the only factor outside their sphere of influence which will impact on their cost, and standard, of living.