House Price to Earnings Ratio

House Price Earnings Ratio

This shows the ratio of house price to average earnings for first time buyers. Although first time buyers is only a segment of the market, the trends are indicative of wider trends in the ratio of house prices to earnings.

As expected, the ratio of London house price to earnings is higher than the UK average. This is despite London having higher wages than the UK average. The relative shortage of space for new houses, means house prices in London have been pushed up to over 7 times average earnings at the peak in 2007.

The long term average for house price to earnings ratio is 3.5.

In the last boom of the late 80s, the ratio got close to 5.0. This meant that 2007 set a new record for house price to earnings ratio.

Despite fall in the house price to earnings ratio it still remains above the long term average.

Is it possible for House Price to Earnings Ratios to Increase in the Long Term?

Long Term House Price to Earnings Ratio (FTB)

House price to earnings ratios could increase in the long term if:

• There was a period of stable and low interest rates, reducing the cost of mortgage interest payments.
• If parents increasingly give deposits to children to enable them to buy more expensive houses.
• If there is a continued shortage of housing due to restrictions on building new houses and continued growth in number of households.
• If banks are willing to lend mortgages with bigger income multiples or if banks / government encourage more – part rent / part buy schemes.

The Credit crunch of 2007-09 caused banks to abandon their previous reckless mortgage lending. 100% mortgages and mortgages 5 times incomes were quickly removed as banks ran out of funds to lend. There may seem little prospect of banks returning to this kind of lending, but, that’s probably what people thought in 1995 after last crash.

Problems of House Price to Earnings Ratio.

Just because the long term house price ratio could increase, doesn’t mean it will. If it does increase, it creates various problems:

• More difficult for young people to get on property ladder.
• Higher % of Income going towards cost of mortgages
• Re-distribution of income from young to old.
• Buying a house may depend on having generous parents.
• Increased pressure to take out risky mortgages several times income.

House Price statistics