Housing Market Affordability in Northern Ireland

Housing Market Affordability in Northern Ireland A report commissioned by the Northern Ireland Housing Executive and Chartered Institute of Housing from Professor Steve Wilcox, University of York The Regional Strategic Housing Authority

Contents Introduction...3 Trends in housing market affordability in Northern Ireland...4 Local house price to income ratios...5 Local affordability in 2005...7 The Intermediate Housing Market...8 Local Intermediate Housing Markets...11 Conclusion...12 References...13 2

Introduction This report provides an analysis of housing market affordability in Northern Ireland in 2005, undertaken applying the same methodology as an earlier report on affordability in Great Britain that was conducted for the Joseph Rowntree Foundation. The report shows how housing market affordability in Northern Ireland has continued to worsen, but mortgage cost to income ratios remain some way below the peak level seen in 1989, the peak year of the previous housing market boom. The report then sets out average house price to income ratios for each local authority area in Northern Ireland, together with an analysis of the proportion of younger working households in each area that cannot afford to buy, and identifies the potential market for intermediate housing market products and policies to assist working households with incomes at the margins to enjoy, in one form or another, access to some form of home ownership. There are a number of distinctive characteristics to these analyses. They are based on household earnings not individual earnings; they are based on house prices for two and three bedroom dwellings; they reflect local data on the distribution of earnings, and they develop a new approach to defining potential intermediate housing markets. The first section sets out the results of the analysis of local level house price to income ratios, while the second section sets out the results of the local level analyses of intermediate housing markets. Key points about the methodology and data sources, which are unchanged from the previous year, are covered in each section as appropriate. A fuller methodological note appears as an appendix in the Great Britain report (1). 3

Trends in housing market affordability in Northern Ireland Housing market affordability continued to worsen over the last year, and first time house buyer house prices rose in 2005 to represent almost 4.2 times average annual earnings in Northern Ireland (for all full time earners). This is a historic peak in house price to earnings ratios, and by far transcends the level in Northern Ireland just two decades ago, when the equivalent average house price to earnings ratio was just under 2.5 to one. However the sharp rise in house prices over the last decade not only reflects continuous economic growth and rising incomes, but also the significant reduction in interest rates since the last housing market boom. In 1990 interest rates were over 14%, they fell continuously over the subsequent decade, and since 2000 have hovered around 5% (5.2% in 2005). As a result of those lower interest rates, mortgage costs as a proportion of earnings have not risen at anything like the rate of the house price to earnings ratios. Both the house price to earnings ratios, and mortgage costs as a proportion of earnings are shown in Figure 1. As can be seen while mortgage costs have risen over the last decade nonetheless in 2005 average mortgage costs for first time buyers represented just 25% of average earnings, compared to almost 32% in 1989, when interest rates peaked at 14.4%. Thus on this measure affordability in Northern Ireland in 2005 remained far less acute than at the peak of the last housing market boom. Figure 1: Housing Market Affordability in Northern Ireland House prices to earnings Ratios Percentage Mortgage costs to earnings All full time earnings and first time buyer house prices Source: Survey of Mortgage Lenders (SML)/Reguated Mortgage Survey (RMS) and Annual Survey of Housing and Earnings (ASHE) The mortgage costs over all years have been calculated assuming a constant 18% deposit (the UK average over fifteen years from 1990 to 2004), and a standard 25 year repayment mortgage, or annuity, at the interest rate prevailing in each year. In practice average first time buyer deposits in Northern Ireland fluctuated over the last two decades as a proportion of house prices, but were higher in 2005, at 22%, than in any other year than 1993. The higher deposits in 2005 will have slightly softened the impact on mortgage costs to earnings, as shown in Figure 1, but at the same time this represents a further affordability challenge for those households without inherited or other wealth available to make larger deposits. 4

Local house price to income ratios House price to income ratios in 2005 for every local authority area in Northern Ireland are shown in Table 1. Local house price data is readily available through the Northern Ireland House Price Index (2), but while this gives an indication of the type of properties sold in any area the data does not provide any indication of the size of dwellings in each area. Yet survey data clearly indicates that the size of dwellings vary widely, both regionally and more locally. In order to provide a consistent measure of house prices as between one locality and another the analyses in this study therefore makes use of a specially commissioned data set from the Survey of Mortgage Lenders (SML), that was provided by the Department of Communities and Local Government. This has provided average house prices for every local authority area in the United Kingdom based on an equal mix of two and three bedroom dwellings. This data has only recently become available, as the sample size of the SML has now increased to a level where it can provide robust local data for almost every area. The local analyses are based on the household incomes of working households. This measure is preferred because it is households that purchase dwellings, not individuals, and a high proportion of home buying households have dual incomes. Figure 1 uses individual earnings as a default, as data on the household incomes of working households is not readily available over the long run. The local analyses are also based on the younger households that comprise the vast majority of first time entrants to the home owner sector. In more technical terms the analyses are for households with a household representative person aged from twenty to thirty nine years old. Local level household incomes have to be computed - national surveys are only sufficiently large to provide regional data. The local household incomes for these analyses are computed from Census data showing the numbers of working households in local authority area, and data on mean average individual earnings in each area (defined on the basis of place of residence) drawn from the new Annual Survey of Housing and Earnings (ASHE). The local computations are related to, and controlled by, regional data from the Expenditure and Food Survey (EFS). The local computations were undertaken separately for households with a single earner, and those with two (or more) earners. In Northern Ireland the average income for younger working households with a single earner was 19,814 in 2005, while the average income for dual earner households was 38,854, and the average for all younger working households was 30,099. These earnings levels are lower than those in Scotland and in each and every region of England; but slightly higher than those in Wales. 5

Table 1: House price to income ratios 2005 Based on mean house prices for 2/3 bedroom dwellings and household earnings for working households with HRP aged 20-39 House price Household earnings Ratio Antrim 96,774 27,186 3.56 Ards 108,172 28,142 3.84 Armagh 87,954 32,869 2.68 Ballmena 102,216 31,772 3.22 Ballymoney 102,072 26,603 3.84 Banbridge 92,893 34,060 2.73 Belfast 112,576 30,040 3.75 Carrickfergus 102,346 32,016 3.20 Castlereagh 120,011 37,721 3.18 Coleraine 121,947 31,704 3.85 Cookstown 122,831 31,866 3.85 Craigavon 86,111 28,454 3.03 Derry 89,343 28,798 3.10 Down 112,024 31,860 3.52 Dungannon 90,520 29,999 3.02 Fermanagh 105,521 27,451 3.84 Larne 85,010 26,478 3.21 Limavady 97,591 28,085 3.47 Lisburn 111,003 28,787 3.86 Magherafelt 94,398 35,027 2.69 Moyle 100,982 24,560 4.11 Newry & Mourne 109,529 25,938 4.22 Newtownabbey 94,017 33,327 2.82 North Down 115,474 27,602 4.18 Omagh 96,121 33,197 2.90 Strabane 95,619 22,547 4.24 Northern Ireland 104,184 30,098 3.46 Source: SML/RMS, ASHE, Census 2001, Expenditure and Food Survey (EFS) Note : Due to small sample sizes the results for Moyle should be treated with particular caution. 6

Local affordability in 2005 Average house prices, for two and three bedroom dwellings, were highest in Cookstown in 2005 at 122,831, followed by Coleraine at 121,947 and Castlereagh at 120,011. While Cookstown and Coleraine do have relatively high house price to income ratios they are not the least affordable areas in Northern Ireland, as they are also characterised by above average working household incomes. However average household working incomes (for younger households) were highest in Castlereagh, and as a result it had a relatively low house price to income ratio (3.18 to 1) despite the high house prices. The least affordable areas in Northern Ireland in 2005 were Strabane (4.24 to 1), Newry & Mourne (4.22 to 1) and North Down (4.18 to 1). The high ratio for Strabane was a consequence of the area having the lowest household earned incomes in Northern Ireland, and despite house prices being rather lower than the Northern Ireland average. In contrast Newry & Mourne and North Down are both characterised by a combination of rather above average house prices, and rather below average household earnings. At the other end of the scale the most affordable areas in Northern Ireland were Armagh (2.68 to 1), Magherafelt (2.69 to 1) and Banbridge (2.73 to 1). In each case these areas are characterised by house prices well below the national average, at the same time as household earnings well above the national average. Indeed house prices in Armagh were the second lowest in Northern Ireland, while the highest average household earnings were in Magherafelt. This pattern differs from other parts of the UK, where the most affordable areas are typically those that have suffered long term economic decline, and have below average incomes combined with particularly low house prices. 7

The Intermediate Housing Market The Intermediate Housing Market (IHM) analysis essentially relies on the same data sources as the ratios analysis. However it uses lowest decile and lower quartile house price figures rather than the mean house price figures used in the ratios analysis. The report sets out two IHM measures - based on broad and narrow definitions. The broad definition of the IHM in each local authority area is the proportion of working households in each area unable to purchase at lower quartile house prices for two and three bedroom dwellings. The narrow definition of the IHM in each local authority area is the proportion of working households in each area that can afford to pay a social rent without recourse to housing benefit but cannot purchase at lowest decile house prices for two and three bedroom dwellings. The relationship between these measures is illustrated in Figure 2. This shows the three sub sectors within the broad IHM - the working households unable to meet a social housing rent without recourse to housing benefit, the households in the narrowly defined IHM, and the households able to buy at lowest decile house prices, but unable to buy at lower quartile house prices. Previous analyses have taken a different approach in defining intermediate housing markets. They have, in effect, taken a given intermediate housing market product (typically one form or another of shared ownership) and identified the households able to afford that particular product, but unable to afford outright house purchase. The objective of the approach adopted in this report is to move away from analyses based on a given existing intermediate housing market product, and instead to identify the characteristics and scope of the target market that such products should be being developed to serve. However it should be emphasized that, in common with earlier analyses, this is a needs based assessment of the requirement for intermediate housing market products, rather than a demand based assessment. Figure 2: Broad and Narrow Intermediate Housing Markets Broad and Narrow Intermediate Housing Market Not in work In work but on HB Not on HB but cannot buy at LD level Cannot buy at LQ level Can buy at LQ level Narrow Intermediate Housing Market 8

There will be additional demands for intermediate housing market products where they offer households the opportunity to obtain larger or better quality properties than they could afford to buy at the lower end of the housing market, or to purchase in more attractive and expensive localities than they could otherwise afford. Meeting those demands may have a legitimate policy objective in terms on ensuring a greater degree of social mix in areas with more expensive properties, and in assisting with the recruitment and retention of public sector key workers. Similarly intermediate housing schemes may have a role to play as part of regeneration plans in areas of low demand, even when the needs based assessment shows there is a very limited IHM for the local authority area as a whole. The results of the IHM analysis for each local authority area in Northern Ireland are shown in Table 2. The analysis assumes a maximum mortgage of 3.75 times household income for the working households with a single adult earner, and 3.25 times household income for households with two (or more) adult earners. This is based on 2004 data showing that only a quarter of all first time buyers were able to secure advances at higher levels relative to their incomes. It must also be recognised that a further proportion of working households would be able to purchase dwellings with prices below the lowest decile level for two and three bedroom dwellings. In many cases these would be smaller properties. The precise numbers and proportions will vary from one area to another, depending on the distributional profile of house prices and sizes, and household incomes in each area. Additionally some households will be able to purchase where they are able to purchase utilising significant levels of savings to supplement their mortgage. However, the IHM analysis does already assume an 18% deposit, based on the recent average level for deposits by first time buyers. If the analysis does not then provide an absolute measure of working households unable to purchase in any circumstances, it nonetheless provides a consistent measure of the relative difficulty of accessing even the lower end of local housing markets. The lowest decile, lower quartile, and mean average house prices for two and three bedroom dwellings in every local authority area in Northern Ireland are set out in Table A1. The total numbers of younger working households in each area (those with a household representative person aged 20-39) are set out in Table A2. The proportions of households falling within the IHM (and its sub sectors) were modelled using data from the Annual Survey of Hours and Earnings (ASHE) showing the distribution of individual earnings within each local authority area. As with the ratios analysis it was assumed that the distribution of incomes of both single earner and multiple earner households matched the distributional profile for individual earnings, and factors were applied to ensure that the modelled local household incomes were consistent with the regional data from the Expenditure and Food Survey (EFS). In Northern Ireland the earned incomes of single earner households in 2005 were 1.117 times the level of individual earnings shown by ASHE, and the earned incomes of multiple earner households were 1.96 times those for single earners. 9

Table 2: Proportion of younger working households in the Intermediate Housing Market in 2005 Broad Intermediate Housing Market Working HB & not L.D. Narrow L.D. not L.Q. Antrim 39.0 4.9 14.7 19.3 Ards 39.1 2.0 21.4 15.7 Armagh 21.9 1.9 9.9 10.2 Ballmena 35.1 5.9 18.8 10.5 Ballymoney 33.5 1.2 17.3 15.0 Banbridge 22.1 0.8 10.3 11.1 Belfast 36.6 4.4 19.3 12.9 Carrickfergus 33.2 1.9 16.8 14.4 Castlereagh 28.7 0.5 12.8 15.4 Coleraine 41.8 2.3 26.2 13.2 Cookstown 50.5 2.0 41.2 7.3 Craigavon 25.6 2.3 13.2 10.2 Derry 29.8 2.5 10.8 16.5 Down 32.1 2.2 21.8 8.1 Dungannon 18.3 1.6 9.8 6.8 Fermanagh 34.8 2.6 23.4 8.8 Larne 26.8 4.8 9.9 12.0 Limavady 37.9 2.4 26.6 9.0 Lisburn 34.6 2.3 20.8 11.5 Magherafelt 23.1 1.6 7.1 14.4 Moyle 48.3 6.0 26.3 16.0 Newry & Mourne 44.8 7.1 24.7 13.0 Newtownabbey 16.8 0.0 8.2 8.6 North Down 48.3 5.3 32.6 10.3 Omagh 27.9 1.6 21.7 4.6 Strabane 43.0 5.4 18.2 19.4 Northern Ireland 33.5 3.0 18.2 12.2 Source: SML/RMS, ASHE, Census 2001 and EFS Note : Due to small sample sizes the results for Moyle should be treated with particular caution. 10

Local Intermediate Housing Markets Across Northern Ireland as a whole some 34% of all younger working households could not afford to buy at lower quartile house prices for two and three bedroom dwellings. However the incomes of some 3% of all working households was so low that they would qualify for housing benefit in order to pay a sub market rent in dwellings rented from the Northern Ireland Housing Executive. Moreover some 12% could afford to buy at lowest decile house prices; albeit that they could not afford to buy at lower quartile prices. Consequently just 18% of all younger working households fell within the narrow Intermediate Housing Market (IHM); that is they can afford to pay more than a NIHE rent, but still cannot afford to buy at the very bottom of the housing market (ie at lowest decile house prices). The rankings of authorities in Northern Ireland on the narrow IHM measure are quite distinct from those for the house price to income ratios. In Cookstown 41.2% of all younger working households fell within the narrow IHM, as did 32.6% of the same households in North Down, and 26.6% of those in Limavady. However by virtue of its size, by far and away the largest potential market for IHM schemes, such as shared ownership, is to be found in Belfast, although in proportionate terms it only ranked slightly above the national average on this measure.. At the other end of the scale there are a number of areas where the scope for IHM schemes is very limited. Just 7.1% of younger working households fell within the narrow IHM in Magherafelt, 8.2% in Newtownabbey and 9.9% in Larne. In those areas there may be a regeneration or social inclusion rationale for developing IHM schemes; but there is only a limited case in terms of simply meeting housing needs. The differences in the results from the ratios and IHM analyses are an indication that, particularly in Northern Ireland, analyses that are simply based on averages only tell one part of the story. It is the differences in the distributional profiles of earnings and house prices in each area that lead to such different results from the two analyses. 11

Conclusion Housing market affordability in Northern Ireland continued to worsen in 2005, and house price to income ratios rose to record levels. However, in part, the sharp rise in house prices over the last decade has been fuelled by lower interest rates, and the rise in mortgage costs relative to incomes has not been quite so severe, and mortgage costs as a proportion of earned incomes remain some way below the levels experienced at the peak of the last housing market boom in 1989. This report has analysed both the house price to household income ratios for younger working households in each area in Northern Ireland, and the proportion of those households with insufficient incomes to buy even at the lower end of their local housing markets. While Strabane was the area with the highest average house price to income ratios, Cookstown had by far the highest proportion of younger working households unable to buy at the lower end of the market. These results have important implications for housing policy in Northern Ireland, and particularly for the need to ensure an adequate and targeted supply of affordable housing for those working households unable to buy their own home, even at the lower end of local housing markets. In particular the results indicate those areas where it would be most appropriate to focus the supply of shared ownership and other forms of intermediate housing market housing. 12

References 1 The geography of affordable and unaffordable housing, Steve Wilcox, Joseph Rowntree Foundation, 2006. 2 Northern Ireland Quarterly House Price Index, Q4 2005, University of Ulster, 2006. 13

Table A1: House prices for 2/3 bed dwellings Local authority area Lowest decile Lower quartile Mean average Antrim 52,950 79,438 96,774 Ards 65,500 84,438 108,172 Armagh 53,000 67,500 87,954 Ballymena 59,000 81,250 102,216 Ballymoney 65,550 85,188 102,072 Banbridge 60,963 79,875 92,893 Belfast 62,500 81,250 112,576 Carrickfergus 61,650 83,000 102,346 Castlereagh 67,275 95,500 120,011 Coleraine 75,700 92,000 121,947 Cookstown 92,975 106,250 122,831 Craigavon 54,475 68,063 86,111 Derry 52,100 71,000 89,343 Down 66,500 81,938 112,024 Dungannon 54,250 63,375 90,520 Fermanagh 63,450 75,500 105,521 Larne 47,300 63,000 85,010 Limavady 72,000 83,313 97,591 Lisburn 65,950 82,750 111,003 Magherafelt 48,400 69,125 94,398 Moyle 63,700 84,250 100,982 Newry & Mourne 61,900 82,250 109,529 Newtownabbey 57,528 73,844 94,017 North Down 77,000 92,250 115,474 Omagh 72,500 81,625 96,121 Strabane 53,250 75,000 95,619 Source: SML/RMS 14

Table A2: Numbers of younger working households in each local authority area None One Two(+) All Antrim 856 2,333 2,774 5,107 Ards 1,088 3,295 3,877 7,172 Armagh 990 1,976 2,392 4,368 Ballmena 1,027 2,249 3,027 5,276 Ballymoney 514 1,053 1,349 2,402 Banbridge 625 1,887 2,369 4,256 Belfast 10,917 15,071 12,005 27,076 Carrickfergus 679 1,923 2,234 4,157 Castlereagh 957 3,251 3,886 7,137 Coleraine 1,329 2,450 2,681 5,131 Cookstown 703 1,241 1,354 2,595 Craigavon 1,979 3,564 4,001 7,565 Derry 4,345 4,377 4,143 8,520 Down 1,238 2,496 2,902 5,398 Dungannon 1,064 1,753 1,969 3,722 Fermanagh 1,135 2,127 2,248 4,375 Larne 546 1,333 1,530 2,863 Limavady 758 1,386 1,540 2,926 Lisburn 2,367 4,987 5,591 10,578 Magherafelt 625 1,482 1,990 3,472 Moyle 394 558 563 1,121 Newry & Mourne 2,356 3,158 3,333 6,491 Newtownabbey 1,511 3,700 4,603 8,303 North Down 1,032 3,446 3,761 7,207 Omagh 1,173 1,690 1,981 3,671 Strabane 1,125 1,468 1,458 2,926 Northern Ireland 41,333 74,254 79,561 153,815 Note & Source : Households with a household representative person aged 20-39. Data from 2001 Census. 15

This publication is available in different formats. Please contact: Joe Frey Head of Research Northern Ireland Housing Executive The Housing Centre 2 Adelaide Street Belfast BT2 8PB Tel: (028) 9031 8540 Email: joe.frey@nihe.gov.uk February 2007 www.nihe.gov.uk CS248/02/07