Published: 14 October
Reading time: Four minutes
Homes are more affordable in terms of income multiples than they have been since 2022. But as our UK Chief Economist James Sproule points out, that doesn’t mean they are affordable.
UK housing affordability: What the numbers really mean
Handelsbanken Insights Blog
By James Sproule, UK Chief Economist
The four forces behind UK property prices
With interest rates shifting and property prices fluctuating, many are asking: is UK housing finally becoming more affordable?
There are four things that we think that drive UK property prices. First up, wealth – as people become wealthier, they spend more on their homes, so this is a positive backdrop to the housing market.
Second is supply and demand, and it has to be appreciated that we have the second lowest stock of housing per capita in Europe, so that weighs on the market.
A third factor is yields, where property typically gives a return of between 4-5% above the risk-free return dictated by gilts. And the last one is affordability.
Focusing on that last one, and looking at the affordability data that has just been released by the ONS, in broad terms, affordability measured in average house prices to average earnings peaked in September 2022 and has fallen away since then to sit at 4.9.
That’s both because house prices have come down a bit and because earnings have gone up. And if you look at the other measure of affordability, mortgage payments as a percentage of income, again, the stretched affordability seen in 2022 and 2023 has fallen from 38% to 34% of income, maybe not as much of a fall as people anticipated originally, but there has clearly been an impact of lower interest rates.
Regional differences: why London skews the picture
But that's really when you're looking at very broad UK-wide figures. Let's break those figures down a bit. Intuition would suggest, and data would show, that housing in Scotland, Wales and Northern Ireland is a good deal more affordable than that in England and that London is by far the least affordable market in England.
The London figures are stark: the lowest cost housing is 5.8 times earnings and this stretches up to as much as 30 times the average income. What is going on here? Clearly no one is borrowing 30 times their income (for a start no smart bank would ever contemplate such lending).
One key factor is that affordability measures the entire value of a home against current income, taking no account of wealth or equity in existing homes.
Invariably what has happened over the last few decades has been people have been trading up the property ladder. They buy a starter home or flat, and several years later they flip that, and in doing so they make and take the accumulated equity with them.
Therefore the real measure of affordability is income plus accumulated wealth ie for most people, equity in their existing home. However, the UK levies more in property taxation relative to GDP than any other OECD country and most of that takes the form of stamp duty.
Going back to our example of the average homebuyer, the rises to stamp duty have taken an increasing amount of the accumulated capital each time they flip their home, meaning they have less wealth to invest in their next property purchase.
House price growth: A long-term perspective
Another trend has been a fading of growth in average house prices since the early 1980s. House prices grew in nominal terms by 188% over the course of the 1980s, but by the 2010s this decade-long performance had fallen to 42%. While this may seem discouraging, it does mean for those looking for homes, prices are no longer racing ahead.
All of this means that the simple affordability calculation based on income which many people will see in the news, is only part of the picture.
What’s next for UK homebuyers?
So where do we go from here? Looking at data on house prices-to-income affordability is not as straightforward as some commentators might assume. Our economy is more complex, as is how people will buy their homes. What we can see is that ending up in a comfortable family home remains an eminently achievable objective, but that it does require the quiet accumulation of capital and remember that it is the bid that sets prices, if a house is truly unaffordable, it will not be sold.
Key Takeaways:
- Equity and accumulated wealth play a major role in real affordability.
- Stamp duty continues to erode capital gains for home movers.