Housing affordability worst its ever been as prices outstrip earnings

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typical London home now costs nearly ten times average local income as surging house prices reduce affordability to its lowest level on record, according to Halifax.

The analysis, based on data from the Halifax House Price Index, found that while house prices in the UK leapt by 16 per cent since the start of the pandemic, the average income has only risen by 2.7 per cent over the same period.

In the first quarter of 2022, the cost of a typical UK home was £ 279,431, while the average full-time worker earned £ 39,402. This puts the house price to income ratio at 7.1, the highest, and least affordable, level ever recorded.

In London, where the average property price is now £ 534.97, the house price to earnings ratio has widened to an eyewatering 9.7 – the highest of any UK region or nation.

This compares to a ratio of 9.0 at the start of the pandemic, and 6.8 back in 2007, when the capital was yet to experience the boom in house prices in the years following the global financial crisis.

It comes as the latest official sold price data shows London house prices rose 7.9 per cent in the year to April 2022. While annual price growth remains strong, the monthly figures show a much less dramatic rise, with homes in London selling for one per cent more in April than in March.

The two-month lag in sold house price reporting means that the current economic uncertainty and growing crisis in consumer confidence caused by soaring inflation and the threat of recession are not yet fully evident in the Land Registry figures.

On a national level, the gap between earnings and house prices has risen in the past two years, from a ratio of 6.2 at the start of 2020.

‘Many buyers continue to make the numbers work for their circumstances’

Across the country, the most unaffordable areas to buy a home are now Westminster and the City of London, where average prices are a huge 14.5 times average earnings.

However the data also showed that the two central London hotspots have seen the sharpest improvement in the house price to earnings ratio of any location since the start of the pandemic, falling from 16.8 at the start of 2020 to 14.5 this year.

Halifax said this emphasizes the slowdown seen in some prime property markets in major cities over recent years.

Despite affordability worsening over the last couple of years, the research also revealed that market activity has been heightened with Halifax saying this suggests “many buyers continue to make the numbers work for their circumstances.”

Affordability for first-time buyers

Last year saw first-time buyer numbers rise at a record rate (up 35 per cent) to reach an all-time high of 409,370.

At a national level the first-time buyer house price ratio is 5.6 times average earnings, compared to home-movers at 8.5.

However, first-time buyers also saw a squeeze in affordability as prices rose quickly during the pandemic, increasing the challenge of raising a suitable deposit without the benefit of a corresponding increase in value of a property they already own.

Halifax explained first-time buyers are still managing to get on the ladder by making joint mortgage applications and drawing on two salaries, or by benefiting from other sources of funds, such as the ‘bank of mum and dad’.

With the average first-time buyer now 32 years old (three years older than a decade ago), they are likely to be more established in work than ever before, with the potential for higher earnings.

The last time the UK house prices experienced such sustained growth in house prices, leading up to the summer of 2007, average earnings were £ 30,508 and the typical house price was £ 194,207. This generated a house price to earnings ratio of 6.4.

Andrew Asaam, Mortgages Director, Halifax, said: “There’s no question that the economics of buying a home have changed significantly over the last couple of years. Soaring property prices and slower wage growth have combined to stretch traditional measures of housing affordability.

“However, we also know from strong transaction levels that demand has remained extremely strong over that period, both from home-movers seeking bigger properties, and first-time buyers taking their first steps onto the ladder.

“It’s also important to highlight the responsible approach taken to mortgage lending in this environment, with lenders conducting thorough checks to ensure repayments are manageable even if interest rates rise more sharply in future.”

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