House prices are still affordable in the UK despite the recent property boom, a report has claimed.

The Cheltenham and Gloucester said that low interest rates, combined with modest earnings growth, means that average homeowners are spending less than 20 per cent of their combined income on repayments.

Forum Response: Nationwide

Alex Bannister, group economist at Nationwide, told ePolitix.com: "While house prices are rising, activity levels are falling with house sales down seven per cent so far during 2003 compared with last year. Last month we highlighted that fewer first-time buyers were entering the market because of affordability constraints and a drop in confidence fuelled by concerns over the economic outlook.

"So far this year there have been around 117,000 first-time buyers - 23 per cent fewer than during the same period last year. It is likely that the number of first-time buyers will stabilise in coming months as confidence recovers post Iraq and in all likelihood interest rates are cut.

"However, affordability is likely to deteriorate further and this will combine with lower disposable income growth (driven by weak pay growth, higher council tax and increased National Insurance payments) and worsening employment prospects. In this environment it is unlikely that a major recovery in first-time buyer numbers is imminent.

"First-time buyers tend to enter at the more affordable end of the market: usually buying flats or terraced properties. However, there are regional variations based on the existing stock of properties and affordability. In London, where affordability is more stretched, the house price earnings ratio is 10.2 for a detached property compared with 4.7 for a flat and 6.0 for a terraced property. Predictably, 60 per cent of London's first-time buyers purchase flats, with a further 26 per cent buying terraced properties.

"In contrast, the North West has an average house price earnings ratio of just 4.5 (3.0 for flats), and consequently over a third of buyers can afford a semi while only 6 per cent buy flats. The recent sharp decline in first-time buyer numbers is likely to reduce upward pressure on the more affordable end of the market.

"We estimate that the growth in flat prices in London has declined significantly recently and this may be an indication that this trend is underway."

Forum Response: Royal Institution of Chartered Surveyors

A spokesman for RICS told ePolitix.com: "For actual first-time buyers, they typically have a higher than average income (30 per cent more in 2002 than national average earnings). The average deposit has also risen from 10 per cent in 1996 to 23 per cent in 2002 for these buyers. As a result, the overall cost of servicing mortgage payments is still very good at current interest rates and below the long-run average.

"However, for would-be buyers, on only average earnings and with a deposit of only 10 per cent for a property, affordability has deteriorated steadily in recent years despite interest rate cuts. We calculate that for first-time buyers on average earnings, the cost of servicing a mortgage is now the highest since 1991 and above the long-run average level."