New data shows that home prices have become cheaper relative to average earnings.
According to major lender Halifax, the cost of a typical home is now 6.7 times median earnings, down from a peak of 7.3 times last summer.
“Downward pressure on house prices after last summer’s peak, combined with strong wage growth, has meant that the UK house price-to-income ratio has declined over the past 12 months.”
Are real estate prices cheaper? The cost of a typical UK home is now 6.7 times median income, down from a peak of 7.3 last summer, according to a Halifax study.
At its peak in June last year, the cost of a typical home was £293,586, while the average annual wage for a full-time employee was £40,196.
A year later, the average house price had fallen 2.5 per cent to £286,276, while wages had risen 7 per cent to an average of £43,090 a year.
But in relation to average earnings, real estate prices are still more expensive than at the beginning of 2020.
Back then, before the pandemic housing boom, house prices were 6.2 times more expensive than average earnings.
This is because in the 18 months between May 2020 and November 2022, average property prices rose by 26 per cent from £231,500 to £292,500, according to land register data.
Are houses more or less affordable than a year ago?
While the narrowing gap between home prices and income over the past year has been welcomed by prospective homebuyers, improving their overall affordability has been offset by rising mortgage rates.
According to Halifax, the average mortgage rate has increased from 2.9 percent to 5 percent over the past 12 months.
For someone with a five-year fixed-rate mortgage, repaid over 25 years with a 25 per cent down payment, that means the typical mortgage cost has risen by 22 per cent in the last year, from £1,020 to £1,249 a month, according to Halifax.
That equates to an increase in mortgage costs as a percentage of income from 30 percent to 35 percent last year.
|territory of the local authority||region||Ratio 2022||Ratio 2023||Change|
|Surrey Heath||South East||11.8||9.6||-2.2|
|Windsor and Maidenhead||South East||13.5||11.4||-2.1|
|test valley||South East||9.5||7.7||-1.8|
|Welwyn Hatfield||east england||10.3||8.7||-1.6|
Looking further back to early 2020, based on Halifax data, it appears that real estate has become even less affordable.
The typical borrower with a five-year fixed-rate mortgage repaying in early 2020 over 25 years with a down payment of 25 per cent will have paid £731 a month, based on an average interest rate of 1.7 cents a month at the time, according to Halifax.
This equated to mortgage costs accounting for just 23 percent of median income, as opposed to 35 percent today.
Henry Pryor, a professional real estate agent and real estate expert, believes that home prices depend on cost and the availability of credit, rather than how they compare to average earnings.
He says: “There are many different metrics used by everything from respected economists to YouTubers and psychics to explain house prices – the house price-to-income ratio is just one of them.”
“When costs are rising, as they have been in the last eighteen months, or lenders are withdrawing products or tightening lending criteria, as they have been, buyers have less money to compete with each other for homes for sale.”
“There are more people who own their own homes than who have a mortgage.” Thirty percent or more of buyers are cash buyers. These people don’t care about the interest or the amount of their salary.
“Many others are mortgage takers, but their affordability depends on the cost of their mortgage, not the multiple of their salary.”
Home prices vs. income: Affordability has improved as values have fallen and wages have risen — but that doesn’t tell the whole story
Are we at the level of 2008?
It’s worth noting that a large proportion of mortgage borrowers are on fixed-rate contracts, meaning they are protected from rate hikes until their current contract closes.
The sharp shift from adjustable rate mortgages to fixed rate mortgages since the financial crisis has meant that, at least in the immediate sense, fewer people are affected by higher mortgage rates than in the past.
However, as these two- and five-year fixed contracts expire, more and more homeowners are seeing their monthly repayments increase.
For example, two years ago it was possible to get a five-year fix at less than 1 percent. Now the cheapest five-year fix is 5.2 percent.
Looking back to the previous peak in house prices in 2007 – before the recent era of record-low interest rates – house prices were 6.4 times higher than median earnings, according to Halifax.
However, the typical cost of a mortgage as a percentage of median income was actually 37 percent, higher than today’s 35 percent.
This was based on an average house price of £192,943 in 2007, an income of £30,262, a mortgage rate of 6.1 per cent and monthly mortgage costs of £941.
|region||Mortgage costs as a percentage of income in 2007||Mortgage costs as a percentage of income in 2022||Mortgage costs as a percentage of income in 2023|
|Greater London area||40%||42%||49%|
|Yorkshire & Humber||34%||25%||30%|
Kim Kinnaird, director of mortgages at Halifax, said: “The sharp rise in interest rates over the past year has meant that amounts now look very different for both homebuyers and those applying for a debt restructuring.”
“Typical monthly mortgage payments are up about a fifth, which is a big jump at any time, but especially during times of greater pressure on the cost of living.”
“We should remember that the past 15 years have been characterized by historically low interest rates.”
“Mortgage costs as a percentage of income are now comparable to those in 2007, despite the significant increase in house prices over the past decade and a half.”
However, Kinnaird also notes that this does not necessarily mean that a fall in house prices in 2008 is imminent.
“Since (2007/2008) a lot has changed in the real estate market and in the overall economy,” says Kinnaird.
“Banks conduct much tighter affordability checks to ensure borrowers can meet their repayments when interest rates are rising and the average loan-to-value ratio is significantly lower.”
The least and most affordable parts of the UK
The impact of higher interest rates is not felt equally across the country, depending on the average home price and income in each region.
For example, while the average home price-to-income ratio has fallen across all countries and regions over the past year, Wales has bucked the trend, rising to 6.8 from 6.7.
Despite having one of the slowest rates of house price growth of any UK region or country over the last year, London remains by far the most expensive place in the country to buy a home, with an average house price of £533,057.
Based on regional revenue, the home price-to-income ratio is 9.3, down from 10 a year ago, the highest of any region.
|territory of the local authority||region||Ratio of house price to income|
|Westminster / City of London||Greater London area||16|
|Kensington and Chelsea||Greater London area||15.7|
|Mole Valley||South East||13.2|
|St Albans||east england||13.1|
|Elmbridge||Greater London area||12.7|
|Dumfries and Galloway||Scotland||3.2|
|hull||Yorkshire and Humberside||3.3|
|Photo credit: Halifax|
The typical cost of mortgages in the capital now accounts for 49 per cent of income, up from 42 per cent last year – again the highest share in the whole of the UK.
In contrast, the North East of England remains the cheapest region of the UK to buy a house in, according to Halifax.
The average house price in the North East is £168,240, meaning property prices are just 4.9 times the average income in the region.
Scotland is the only part of the UK where house prices are less than five times median earnings after falling from 5.2 last year.
Mortgage costs account for 26 per cent of average income in Scotland, the lowest in the country.
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