In the lead up to the credit crunch in 2007, the ratio of house prices reached an all time high. By some measures, the average house price was up to 5 times average income. This occurred because of the rapid growth in house prices combined with an increased availability of mortgages which enabled people to get a bigger mortgage.
After the credit crunch, UK house prices fell 20%, but house price to earnings still remained well above long term trends. UK house prices fell by a smaller amount than other countries, such as Spain and the US. One reason is that there is a shortage of supply in the UK meaning that prices remain higher.
Latest House Price to Income Ratio
The ratio of house price to incomes reached over 5, in 2007, and has barely fallen during the credit crisis.
There has been a steady increase in the advance (deposit) required to get a mortgage in the UK. This is because mortgage companies have become stricter in requiring a bigger deposit.
House Price to Earnings Ratio for First Time Buyers
This graph shows the ratio of house prices to Income for first time buyers using Nationwide House price data. It is interesting to see how far house price to earnings ratios fell in the mid 1990s. House price to income ratios are still much higher than at the end of the last housing bust.
House Price to Incomes Ratio in 2011
House price to incomes ratios are still relatively high. The fall in house prices has been muted by the scarcity of supply. Real wage growth has also been muted due to slow growth. There is also a large regional disparity with Londoners facing greatest difficulty in getting a mortgage.
Ratio of House Price to Incomes for Average Workers
- In 2003 Average household income in England was = £34,197 Average house price = £115,181
House price to income ratio = 3.36
- In 2008 Average income was about £38,302 (1) Average house price =£197,000 (BBC)
Therefore house price to income ratio about 5.1
- London average house prices 4.8 times income (2006), against 2.6 times in 1970.
- The South East, where the ratio has climbed to 4.3 times income from 2.7 times 35 years ago, is the second least affordable region.
House Prices and Mortgage Payments
This increase in house prices is reflected in the increased burden of mortgage payments
- Mortgage interest burden stands at 20% of gross income (up from 11% in 2003) (source Economist)
- Household debt now exceeds 150% of disposable income (this is another historical high)
Graph Showing Mortgage Payments as a % of Take Home Pay for First Time Buyers
Incomes Needed to Get a Mortgage
This graph shows the average income of those with a mortgage. It shows a rapid increase in the average income of people getting a mortgage.
- In 1990 The proportion of people with mortgages on income of over £50,000 was 2.5%. In 2011, the proportion of mortgages was 40%.
- In 2011, only 6.8% of people with mortgages had income of less than £20,000. In 1990, 61% of people with mortgages had income less than £20,000
- Source: ONS House price index May 2012
The Impact of Rising House Prices to Income
- The ratio of house prices to Income remains an important guide to long term affordability of housing.
- However, it does not make it a perfect guide to future house prices. Just because the ratio of house prices to incomes have increased doesn’t necessarily mean a house price crash will occur.
Nevertheless, the rising ratio of house prices to incomes does raise some serious concerns.
Problems of Rising House Price to Incomes Ratios
- Social Mobility. A Rising ratio of house prices to incomes means that it is increasingly difficult for first time buyers (young people) to get on the property ladder. This means young people may have to live in cramped rented accommodation
- Labour Shortages. In areas of high house prices, the lack of affordability may lead to a shortage of key public sector workers.
- Potential for House Price Crash. It is argued that rises in house price to incomes ratios are unsustainable and could lead to a future crash in house prices.
- Encourages Risky Mortgages. To get on the property ladder, first time buyers are having to take out increasingly risky mortgages such as interest only, self-certification; these mortgages can increase the likelihood of mortgage defaults and home repossessions.
Predictions for Future House Price to Incomes Ratios
Some people have predicted that house prices to incomes could reach a multiple of 10 times. They argue this is based on the fundamental inequity between supply and demand. The Future: House Prices 10 Times Income – The Times
Personally, I am sceptical of this claims. How would people be able to afford mortgages if house prices were 10 times. The recent experience of the US, and more powerfully, Japan, show that rising house price to income multiples may be a constraint on future house price growth
Real and Nominal House Price
- Housing Market Statistics
- House price to Incomes BBC
- The Worst is yet to come for UK housing – Economist
- Household Income
- Housing Bubble – wikipedia
- Assuming growth of 2.8% of average incomes since 2003. Note there are different ways of calculating household incomes therefore there is some disparity between data.