First-time buyers hardest hit as mortgages eat into wages

Repaying a mortgage is getting tougher as average pay rises are failing to keep up with house price rises and climbing interest rates, according to figures published by the EBS/DKM Affordability Index.

Couples buying in Dublin need 37 per cent of their joint net incomes to make mortgage repayments. The national average is 28 per cent.

The mortgage burden was found to be heavier in August 2006 than it was in July 2005, when couples buying in Dublin needed an average 29 per cent of disposable income to meet their repayments and nationally buyers needed 23 per cent.

EBS Building Society and DKM Economic Consultants have forecast that by the end of this year, a working couple in Dublin will need over 40 per cent of their net income to fund a mortgage, with the proportion of income required by all buyers nationally expected to exceed 31 per cent.

First-time buyer couples, who tend to buy lower-value properties, are spending 25 per cent of their disposable incomes on mortgage repayments, compared to less than 20 per cent in July 2005. By the end of the year, EBS and DKM forecast that they will use up 28 per cent of their net incomes on their repayments.

The study of housing affordability, published in Irish Property Buyer magazine, assumes that house prices will continue to rise by 1 per cent a month for the rest of the year and that there will be two further quarter point increases in the European Central Bank (ECB) interest rate in 2006.

The ECB rate has increased by 1 per cent since December 2005, putting pressure on new buyers who stretched themselves to buy the properties they wanted.

The figures assume that couples borrow 90 per cent of average property prices over 25 years and that they have a joint income of €70,000, with Dublin workers assumed to earn 10 per cent more.

Over the 18-month period, their pay is assumed to rise in line with the Sustaining Progress and Towards 2016 pay deals, which means their incomes rise by 8.2 per cent.

But average property prices based on the Permanent TSB/ESRI house price index are escalating at a much faster rate. Between July 2005 and July 2006, average house prices grew by 15.4 per cent.

Annette Hughes, director of DKM Economic Consultants, said the index showed affordability was worsening for all buyers, with a "severe" impact on Dublin workers.

"When you take into account recent and expected hikes in gas and electricity prices, the message for home buyers is to think ahead, budget properly and ensure they do not take on a burden of debt that is too large."

EBS head of mortgages Dara Deering urged first-time buyers to look at the Government's affordable housing scheme. Garreth Murphy, editor of Irish Property Buyer, said a rise in mortgage interest relief would help first-time buyers.