Over the last year, house prices have risen quicker than earnings, resulting in an increase in the cost of servicing a mortgage relative to take-home pay. Nationwide data shows that the disparity between high house prices and average earnings are continuing to make raising a deposit significantly challenging for those taking their first step onto the property ladder.
The research highlights that a 20% deposit is now equivalent to 110% of average income – a record high and up from 102% one year ago.
However, while there continues to be a significant gap between the least affordable and most affordable regions across the UK, this has remained broadly stable over the last year. London continues to have the highest house price to earnings ratio at 9.0, although this is still below its record high of 10.2 in 2016.
Scotland continues to have the lowest house price to earnings ratio in the country at 3.4, closely followed by the North region at 3.5.
Andrew Harvey, senior economist at Nationwide, comments: “House price growth has exceeded earnings growth over the past year and the ratio of house prices to average earnings (HPER) has increased to a record high. In the third quarter of this year, the UK first-time buyer house price to earnings ratio stood at 5.5, above the previous high of 5.4 in 2007, and well above the long-run average of 3.8.
“The cost of servicing a typical mortgage as a share of take-home pay is now above its long-run average in the majority of UK regions. By contrast, pre-pandemic, this was only the case in one region (London).
“Recent price patterns suggest an element of rebalancing is occurring where most of the regions that have seen the strongest price growth are those in which affordability is still close to or below the long-run average.
“There has been increased speculation that the Bank of England’s Monetary Policy Committee (MPC) will increase interest rates in the coming months.
“Clearly, much will depend on the Committee’s assessment of the outlook for growth and inflation, but investors expect Bank Rate to be increased from its current record low of 0.1% around the turn of the year – most likely to 0.25% or 0.5% – and perhaps reaching 1% within 12 months.
“Providing the economy does not weaken significantly, the impact of a limited rise in interest rates for existing borrowers is likely to be modest, especially given only 20% of outstanding mortgages are on variable rates.
“The vast majority of new mortgages in recent years have been extended on fixed rates, with five-year fixed rate deals becoming increasingly popular, accounting for nearly half of new mortgages.
“Despite the sharp rise in swap rates in recent months, mortgage rates have remained close to all-time lows. But this may not persist and, if rates for new mortgages were to rise, this would exert further pressure on affordability for prospective first-time buyers.
“We’ve modelled the impact of mortgage rate rises on first-time buyer initial mortgage payments, assuming an 80% LTV mortgage over a 25-year term.
“A 0.4% increase in rates would increase initial mortgage payments by £34 a month. This represents a modest rise in mortgage payments relative to take-home pay from the current level of 31% to 32%. A 0.9% increase in rates would increase initial mortgage payments by £79 a month (from current levels), representing 34% of take-home pay.
“Provided the economic recovery remains resilient, higher interest rates are likely to exert a moderating influence on the housing market, as well as dampening price pressures across the economy more generally.”
James Forrester, Managing Director of Barrows and Forrester, says: “Much has been made about the government’s success of negotiating the pandemic where the property market is concerned. While it’s fair to say the market has never looked stronger, this statement is one based largely on perspective.
"If you own a home and have enjoyed a double-digit increase in value over the last year, you’re no doubt over the moon. However, those struggling to piece together a sufficient deposit are unlikely to share this opinion.
"The cold reality is that if you aren’t looking to buy with the financial support of a second wage, support from the Bank of Mum and Dad, or you don’t earn considerably more than the average person in your respective area, the dream of homeownership is one you’re unlikely to realise until much later in life than you might like.”
Marc von Grundherr, Director of Benham and Reeves, adds: “We’ve seen a respectable level of wage growth in recent years but unfortunately this hasn’t been enough to match the might of the UK housing market. At the same time, record-low interest rates over such a prolonged period of time have been great for those taking their first step on the property ladder with a mortgage, but they’ve been terrible for those attempting to save.
"Even in London, where house price growth has been fairly muted in comparison to much of the UK and wages are more robust, the barrier to homeownership is still incredibly high.
"Unfortunately, there’s not a great deal that can be done although the cyclical nature of the property market does suggest what goes up, will come down. So sitting tight and waiting for a correction is probably the best immediate bet open to struggling homebuyers.”
