S Poddar
The affordability of housing in England and Wales has come back to pre-pandemic levels, mostly because wages are growing at a much greater rate than property prices, official data shows.
In 2023, the median value of a house in England was £290,000, or 7.7 times the median salary of a full-time employee. This represents a fall from the high point of 9.0 in 2021 and is less than the 7.9 measured in 2019, according to the Office for National Statistics (ONS) data.
Even with the improvement in affordability according to the price-to-income ratio, most households have not yet experienced the benefits because of the rise in mortgage rates over the last few years. Nevertheless, this change in affordability offers a better picture for potential buyers who need to prove their income in relation to property prices.
Lucian Cook, residential research head at estate agency Savills, said in his assessment, “It offers a platform for [house price and sales] expansion as those rates fall if you have had some easing in the underlying affordability.
The affordability ratio increased sharply from 2020 to 2021 as interest rates were reduced to record lows, and tax incentives for homebuyers were introduced by the government. These are the factors that drove up demand for properties, increasing house prices in terms of income.
But since 2021, housing prices in England and Wales have increased only a modest 1 percent, with average wages leaping by 20 percent. The sudden growth in inflation and interest rates during this time has resulted in damped home transactions and flat-lined property prices, while wages rose much more powerfully.
At the beginning of 2020, just before the COVID-19 pandemic broke out, usual mortgage rates stood at around 2 percent. Fast forward to the present and they have increased to around 4-5 percent. Therefore, the cost of monthly mortgage payments and affordability checks for aspiring homebuyers are still a lot tougher compared to pre-pandemic levels.
The growth in mortgage costs has affected households over time because most homeowners had fixed-rate mortgage contracts that expired only recently.
Cook highlighted that most borrowers are still preparing for financial pressure, saying, “There are still a large number of households that are set to reach the end of five-year fixed-rate deals later this year and will be facing an increase in their household bill.”
Nationwide data indicates that first-time buyers’ mortgage payments in late 2024 represented 37.7 percent of their disposable income. Though this is modestly lower than the 38.4 percent high reached towards the end of 2023, it is still well above the 27.7 percent seen in the fourth quarter of 2019, before the pandemic.
An individual report published by Savills on Monday noted that the typical mortgaged householder is currently paying £12,754 a year. That is up £2,829 from 2022, when mortgage rates first started to rise.
When adjusted for inflation, the cost of housing across the UK reached its highest level on record in 2024, according to Savills. While housing affordability has improved compared to the peak levels seen in recent years, homes remain significantly less affordable than they were two decades ago. In 2004, the price-to-earnings ratio stood at 6.79, highlighting how much housing costs have outpaced wage growth over the long term.
Tenants are also struggling to cope with the cost of living, as housing costs have inflated at a historic rate over recent years. Property analysis company PriceHubble statistics, released by the ONS, show new tenancies signed in February 2024 included conditions where 29 percent of the tenant’s gross income needed to be used to pay the rent. That is up considerably from 25.8 percent towards the close of 2019.
The confluence of high mortgage rates and escalating rents creates continued challenges for those attempting to break into the housing market. Although recent shifts in affordability ratios indicate a move toward more palatable conditions for buyers, the fact of rising borrowing costs means that many households will continue to bear the pinch.
In the future, a lot will ride on what happens to interest rates in the next few months. If borrowing remains low, prospective buyers will be in a stronger position, with affordability measures and economic trends also in place to provide greater opportunities in the housing market.
