But higher mortgage rates mean homes are now less affordable
- Cost of a typical home now 6.7x average earnings, down from 7.3x last summer
- The impact of rising interest rates has stopped any improvement in affordability
- We look at whether homes are more or less affordable now than in 2007
House prices have become less expensive relative to average earnings, new data has revealed.
The cost of a typical home is now 6.7 times average earnings, according to major lender, Halifax, down from a peak of 7.3x last summer.
Downward pressure on property prices following last summer’s peak, combined with strong wage growth, has seen the UK’s house price to income ratio fall back over the past 12 months’.
At its peak in June last year, the cost of a typical home was £293,586, while the average annual earnings of a full-time worker was £40,196.
A year later, the average house price had fallen by 2.5 per cent to £286,276 while wages have risen by 7 per cent to an average of £43,090 per year.
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But house prices remain more expensive than they were in early 2020, relative to average earnings.
Back then, prior to the pandemic’s property 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 house prices rocketed 26 per cent from £231,500 to £292,500, based on Land Registry figures.
Are homes more or less affordable than a year ago?
While the narrowing gap between house prices and incomes over the past year will be welcomed by prospective home buyers, improvement in their overall affordability has been countered by rising mortgage rates.
Halifax says the average mortgage rate over the past 12 months has risen from 2.9 per cent to 5 per cent.
For someone with a five-year fixed rate mortgage being repaid over 25-years with a 25 per cent deposit, it means typical mortgage costs have increased by 22 per cent over the last year, according to Halifax, from £1,020 to £1,249 a month.
That equates to mortgage costs as a percentage of income rising from 30 per cent to 35 per cent over the last year.
Looking further back, to the start of 2020, it would appear that property has become even less affordable, based on Halifax’s data.
The typical borrower with a five-year fixed rate mortgage being repaid over 25-years with a 25 per cent deposit at the start of 2020 will have been paying £731 a month, according to Halifax, based on an average interest rate of 1.7 per cent at the time.
This equated to mortgage costs representing just 23 per cent of average earnings, as opposed to the 35 per cent today.
Henry Pryor, a professional buying agent and property expert, believes house prices are based more on the cost and availability of credit, rather than how high they are compared to average earnings.
He says: ‘There are lots of different measures used by everyone from respected economists to YouTubers and psychics to explain house prices – house price-to-income being just one.
‘If the cost goes up as it has done over the past eighteen months or lenders withdraw products or tighten lending criteria, as they have done, then buyers have less money to compete with one another for homes that are for sale.
‘More people own their home outright than who have a mortgage. 30 per cent or more of buyers are cash buyers. These people aren’t bothered about interest rates or the multiple of their salary.
‘Many others are mortgage borrowers but their affordability is down to the cost of their mortgage not to the multiple of their salary.’
Are we at 2008 levels?
It’s worth pointing out, that a large chunk mortgage borrowers are on fixed rate deals, meaning they are protected from rate rises until their current deal finishes.
The big shift from variable rate mortgages to fixed rate mortgages since the financial crisis means that fewer people are being affected by higher mortgage rates than in the past, at least in the immediate sense.
However, as these two-year and five-year fixed deals come to end, an increasing number of homeowners are seeing their monthly repayments balloon.
For example, it was possible to get a five-year fix at less than 1 per cent two years ago. Now, the cheapest five-year fix is 5.2 per cent.
Looking back to the previous peak in house prices in 2007 – prior to the recent era of record low interest rates – the house prices were 6.4 times higher than average earnings, according to Halifax.
However the typical cost of a mortgage as a percentage of average earnings was actually higher than today’s 35 per cent, at 37 per cent.
This was based on a 2007 average house price of £192,943, earnings of £30,262, a mortgage rate of 6.1 per cent, and a monthly mortgage cost of £941.
Kim Kinnaird, mortgages director at Halifax said: ‘The sharp rise seen in interest rates over the last year has meant the sums now look very different for both homebuyers and those looking to remortgage.
‘Typical monthly mortgage payments are up by around a fifth, which is a big jump at any time, but particularly during a wider cost of living squeeze.
‘We should remember the preceding 15 years have been characterised by historically low interest rates.
‘Mortgage costs as a proportion of income are now comparable to those seen in 2007, despite the significant rise in house prices seen over the last decade and a half.
However, Kinnaird also points out that this doesn’t necessarily mean a 2008 house price fall is looming.
‘Much has changed in the housing market and wider economy since then (2007/2008),’ says Kinnaird.
‘Banks carry out much tougher affordability checks to make sure borrowers can manage repayments when rates go up, and the average loan-to-value is considerably lower.’
The least and most affordable parts of the UK
The impact of higher interest rates isn’t felt equally across the country, depending on the average house price and earnings in each area.
For example, while the average house price to income ratio has fallen in every nation and region over the last year, Wales bucks that trend, where it rose from 6.7 to 6.8.
Despite recording one of the slowest rates of house price growth of any UK region or nation over the last year, London remains by far the most expensive place in the country to buy a home, with an average property price of £533,057.
Based on regional earnings, this puts the house price to income ratio at 9.3, compared to 10 a year ago, the highest of any region.
Typical mortgage costs in the capital now account for 49 per cent of earnings, up from 42 per cent last year – again the biggest proportion of anywhere in the UK.
By contrast, the North East of England remains the most affordable UK region in which to buy a home, according to Halifax.
The average house price in the North East is £168,240 meaning that property prices are only 4.9 times higher than average incomes in the area.
Scotland, is the only part of the UK where house prices are less than 5 times average incomes, having fallen from 5.2 over the last year.
Mortgage costs represent 26 per cent of average incomes in Scotland, also the lowest anywhere in the country.
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