House Prices Fall, But Mortgage Costs Rise

According to recent data from Halifax, house prices in the UK have become less expensive relative to average earnings. The cost of a typical home is now 6.7 times average earnings, down from a peak of 7.3 times last summer. This decline in house prices, combined with strong wage growth, has resulted in a decrease in the house price to income ratio over the past year.

While this decrease in the affordability gap between house prices and incomes is good news for prospective homebuyers, it is important to note that rising mortgage rates have offset some of these improvements. Over the past 12 months, the average mortgage rate has risen from 2.9% to 5%, leading to a 22% increase in typical mortgage costs for someone with a five-year fixed rate mortgage and a 25% deposit. This increase in mortgage costs has resulted in a rise in mortgage costs as a percentage of income, from 30% to 35%, over the past year.

1. House Prices vs Earnings: The Big Picture

Current Status: The cost of a typical home is now 6.7 times average earnings.
Last Year’s Status: This is down from a peak of 7.3 times average earnings last summer.
Comparison to 2020: Before the pandemic-triggered property boom, homes were about 6.2 times more expensive than average earnings.
Reason for Change: This change was influenced by a drop in property prices since last summer and strong wage growth.

2. A Snapshot: Prices and Earnings Over the Last Year

Last year, the average house was priced at £293,586.
Average earnings for a full-time worker were £40,196.
A year on, house prices decreased by 2.5% to £286,276, but wages went up 7% to £43,090 annually.

3. Mortgage Rates: The Hidden Challenge

Over the past year, the average mortgage rate jumped from 2.9% to 5%.
This means the typical monthly mortgage expenses for a certain example have risen 22%.
In practical terms, monthly costs went from £1,020 to £1,249.
As a result, mortgage costs as a percentage of income rose from 30% to 35% in a year.

4. Regions With Most Improved Affordability:

Surrey Heath, Cambridge, Windsor and Maidenhead, and a few others have seen significant improvements in affordability when looking at house prices compared to earnings.

5. Past vs Present: 2020 and Beyond

In 2020, a typical mortgage holder paid £731 a month, which was only 23% of average earnings.
Today, that figure stands at 35%.

6. Expert Insights: More to the Story Than Just Prices vs Earnings

Henry Pryor, a property expert, suggests that house prices are driven more by the cost and availability of credit than by how they compare to average earnings, “If the cost goes up as it has done over the past eighteen months or lenders withdraw products or tighten lending criteria, as they have done, then buyers have less money to compete with one another for homes that are for sale.”
He highlights that many homeowners don’t have mortgages, and of those who do, their mortgage affordability is more about the mortgage cost than how it compares to their salary.

7. Historical Context: 2008 Comparisons

Currently, a lot of mortgage holders have fixed-rate deals, safeguarding them from immediate rate hikes.
However, as these fixed deals end, many homeowners will face bigger monthly payments.
In 2007, houses were 6.4 times the average earnings. Mortgage costs as a percentage of average earnings were higher at 37% compared to today’s 35%.
Yet, this doesn’t necessarily suggest a housing price crash like in 2008. Banks now conduct more stringent checks and the average loan-to-value is much lower.

8. The Regional Divide: Affordability Varies Across the UK

London remains the priciest place to purchase a home with an average property price of £533,057.
This puts the house price to earnings ratio at 9.3, down from 10 last year, making it the highest of any region.
Conversely, the North East of England is the most affordable UK region. Here, the average house price is £168,240, making houses only 4.9 times the average incomes.

9. The Bottom Line

While houses seem to be getting more affordable in relation to average earnings, the rise in mortgage rates poses a new challenge.
Affordability varies across regions, with places like London remaining relatively expensive.
It’s essential to consider other factors, like credit costs and availability, when gauging the property market’s direction.