UK Housing Affordability

UK Housing Affordability


In this year’s edition of our annual chart on housing affordability in the UK (you can see last year’s chart here), the average house price has continued to grow to more than five times earnings, while mortgage affordability has started to improve.

What does the chart show?

The blue line, measured against the left hand axis, is the house price to earnings ratio. This is calculated by dividing the standardised average house price with average annual earnings, both for the whole of the UK. The dotted blue line represents the average over the period. The red line, measured against the right hand axis, is the mortgage affordability index. This measures the percentage of the average disposable income that a mortgage on a home costing the average amount would represent; for example, a mortgage taken out today on the “average house” would represent 28.9% of average disposable income. As above, the dotted red line is the average for the period. In both cases, a lower number represents more affordable housing.

Why is the chart interesting?

House prices passed a symbolic milestone at the end of last year when they increased above the five times earnings mark. The only other time in at least the last thirty years that this has happened was during the 2004-2008 housing bubble, during which the house price to earnings ratio almost reached 6 in 2007 before crashing in 2008.  The pace of growth now is slower than it was ten years ago, however, and as earnings are now starting to grow at a more normal rate, this may be kept in check as the year goes on.  Although mortgage affordability is now worse than it was last year, it appeared to hit a mini-peak in the third quarter of 2014 before improving.  Mortgage payments are more affordable now than the 30 year average due to historically low interest rates, and movements since 2009 have been generally more reflective of changes in disposable income. With the cost of living driven down by low oil and food prices since last Autumn, mortgage payments have become more affordable as disposable income has increased.  The Bank of England have begun to talk seriously about increasing the base rate within the next six to nine months though, so we will probably see mortgage affordability begin to return to nearer the long-term average.

Posted by Aimée Allam