The Lloyds Affordability Review showed that the house price to income ratio had dropped from 7.6 to 7.3, as earnings growth outpaced house prices.
Average house prices have risen by 0.5% over the year to £299,131, while average earnings have increased by 4.5% to £40,790.
However, this easing in housing affordability has been hindered by higher interest rates, which have pushed up the cost of borrowing to buy a home.
Over the last year, average monthly mortgage repayments have increased from £1,100 to £1,157.
Andrew Asaam, mortgages director at Lloyds, said: “There are some encouraging signs for people looking to buy a home. Wages have continued to rise while house prices have remained relatively stable, helping to narrow the gap between earnings and house prices.
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“However, affordability remains stretched for many households. Mortgage rates are higher than they were a year ago and saving for a deposit continues to be one of the biggest barriers facing first-time buyers.
“Buyers may have more options than they realise, including mortgages designed for those with smaller deposits. While these won’t be right for everyone, they can help some buyers take their first step onto the housing ladder sooner.”
FTB housing affordability improves
The housing affordability ratio for first-time buyers has fallen below six, making it the most affordable it has been since 2015.
The typical first-time buyer property price rose more slowly than earnings at just 0.3%, from £238,875 to £239,681, bringing the ratio to 5.9, down from 6.1.
Lloyds said saving to purchase a home was still a challenge for first-time buyers, as an average saving of £24,000 was needed for a 10% deposit.
Borrowing costs have also increased, with the average monthly mortgage repayment rising from £1,100 to £1,150 over the last year. However, the improvement in earnings means mortgage costs still account for the same proportion of income as last year, at around 34% of the typical monthly pay.
Expensive regions see most improvement in affordability
The biggest improvements in housing affordability were recorded in the least affordable markets, the analysis found.
Affordability eased the most in the South East, with the average home costing 9.1 times earnings, down from 9.7 last year. This was followed by Greater London, which improved from 10.9 to 10.3, and in East England, this eased from 8.7 to 8.2. In the South West, housing affordability fell from 8.2 to 7.7.
Still, London and the South East remain the two most expensive regions to buy a home.
The North East was the most affordable region to buy a home, falling from 5.1 times earnings to five. In Scotland, this was unchanged from a house price to earnings ratio of 5.3.
This improved from 6.5 to 6.3 in the North West and six to 5.8 in Yorkshire and the Humber.
Northern Ireland was the only area where housing affordability worsened, with house prices rising 7.4% compared to earnings growth of 3.7%. This resulted in housing affordability rising from 5.8 to six.
