An examination of UK house price affordability.
In 2013, UK house prices rose 8%, and most forecasters expect UK house prices to continue to rise above inflation in the short term. However, there is a big concern that house prices are already unaffordable for most first time buyers. In many parts of the country, potential buyers are being kept out of the market due to house prices being much higher than average incomes. Because of the lack of affordable housing, many have criticised the government’s Right to Buy scheme – which concentrates on helping people get a bigger mortgage rather than deal with disequilibrium of supply and demand.
UK nominal house prices since 1991
Mortgage payments as % of income
One useful measure of housing affordability is to look at mortgage payments as a percentage of income. In this regard, it doesn’t look too bad.
Since interest rates were cut in 2009, mortgage payments have fallen to a near 20 year low of just 16% of income.
- However, when interest rates rise, many homeowners will see a nasty shock of rapidly rising mortgage payments.
- Also, rising house prices have required a bigger deposit. This means many who might be able to afford mortgage payments are unable to get a mortgage in the first place
Deposits required for first time buyers
The deposit required has risen particularly for first time buyers. from 10% of purchase price in 1995 to 23% in 2012.
Ratio of house prices to income
Another way to examine the affordability of house prices is to look at the ratio of house prices to income.
This ignores the unusually low interest rates affecting cost of mortgage payments and gives an indication of long term trends.
Firstly, there is a big regional disparity. First time buyers in London are seeing house prices at a record 9 times average earnings. For the UK as a whole, the ratio of 5.1 is still above long term trends. It is a higher ratio than the end of the 1980s housing boom.
Mortgage payments as a % of take home pay for first time buyers
For first time buyers taking on large mortgages, the mortgage payments are still taking up a big % of take home pay – despite the low interest rates. The average mortgage payments is lower for average homeowners because many householders took out a mortgage when house prices were cheaper.
Nationwide mortgage payments as % of income
Median income of mortgage borrowers in UK
The graph shows a significant rise in average incomes of those with mortgages.
- In 1990, the proportion of people with mortgages on income of over £50,000 was 2.5%. In 2011, the proportion of mortgages by people with income of over £50,000 was 40%.
- In 2011, only 6.8% of people with mortgages had income of less than £20,000. In 1990, 61% of people with mortgages had income less than £20,000
- There is a similar drop in the % of mortgages held by people under 30 years of age.
- Source: ONS House price index May 2012
Affordability of UK Housing
- This data shows average house price to income ratios. It is based on the ONS mortgage survey.
- After peaking at a ratio of over 5.0 in 2007, there has been a surprisingly limited drop in the ratio of average house price to average incomes.
- The graph also shows that the average advance for buying a house has significantly increased. This is one factor in explaining why the average incomes of those with a mortgage has more than doubled in recent years.
Recent House Price Trends
What Explains the Lack of Affordability?
1. Lack of Supply. After the credit crunch, house prices in many countries, such as the US and Spain fell dramatically. But, in the UK, the drop in house prices has been more muted. This is because the UK never had a boom in house building like other countries.
Housing completions have fallen close to 100,000 a year – well below the level (of 250,000) needed to meet the growth in the number of households. Over the last four quarters to Q3 2013, new build starts have averaged just 22,000 per quarter
See also: Housing supply
2. Low Mortgage Payments. Low interest rates have meant many homeowners have been able to hold onto their houses. The mortgage repossession rate has remained much lower than in 1992 recession. The low cost of mortgages makes buying still attractive compared to renting, which is expensive.
3. Demand from abroad. The London property market is marked by strong demand from abroad which has kept prices high, especially on the luxury end of the market. In London, 7 out of 10 homes over £5 million are going to foreign nationals (this is London)
4. Regional Differences First time buyer ratios are much lower in the north. London ratios are almost twice as high. The housing market has become increasingly marked by regional differences. Property hotspots have seen prices go through the roof, whilst other areas have seen prices stagnate or even fall.
5. Population Growth. The 2011 census showed the fastest rise in the population of England and Wales to 56 million. The growth in the number of households is even greater – increasing demand for housing. The number of households in England is projected to grow to 27.5 million in 2033, an increase of 5.8 million (27 per cent) compared to 2008. This equates to 232,000 extra households per year. (Household projections 2008-2033 – Data.gov)
If you ask an average young person in the street about the affordability of housing, you are likely to hear strong anecdotal evidence that they are not affordable. For many, buying a house looks increasingly difficult. – at least not without help from parents with the deposit.
Because of ultra low interest rates, the cost of mortgage payments as a percentage of income looks relatively low. But, since the mid 1990s, house prices have increased substantially more than inflation. It now requires a very high deposit and this is a big barrier to buying a house.
Furthermore, the era of zero interest rates will not last forever.
A startling statistic is the projection of 250,000 extra households a year until 2033. Yet, the UK is only building 100,000 to 150,000 per year.