Affordable housing market hits a decade high, according to Nationwide's latest report
In a notable development, the house price to earnings ratio in Britain has reached a low not seen in over a decade, marking a significant improvement in the housing market[1][4][5]. The decrease in this ratio is primarily attributed to a reduction from the 2022 peak of 6.9 down to around 5.75 times the average income.
The moderation in house price growth has played a significant role in this reduction. Although house prices have rebounded slightly after a dip, the growth rate has slowed compared to the rapid increases leading up to 2022[1][2]. This trend, combined with the continued growth of average earnings, even after adjusting for inflation, has improved affordability by increasing the denominator in the ratio[1].
Improved mortgage conditions have also contributed to the decrease in the house price to earnings ratio. The availability of higher loan-to-value mortgages and somewhat lower mortgage interest rates compared to their late 2023 peak have eased borrowing constraints for buyers, making market entry easier[1].
The labor market remains strong, with low unemployment and solid household financial health, further supporting income stability and borrowing capacity[1]. These factors have collectively contributed to the reduction in the house price to earnings ratio.
Robert Gardner, Nationwide's chief economist, stated that activity in the housing market is holding up well despite the end of the stamp duty holiday[6]. He also noted that the house price to income ratio is lower than the all-time high of 6.9 recorded in 2022[3].
Jeremy Leaf, a north London estate agent, expects to see a modest improvement all round in the housing market, particularly if interest rates are reduced in the next month or so[7]. Riz Malik, director at R3 Wealth, predicted that house prices are likely to continue rising gradually[8]. However, borrowing costs are expected to moderate a little further if the Bank of England base rate is lowered further in the coming quarters[9].
Zoopla claimed that 83% of buyers would pay stamp duty if they bought a home today, compared to 49% before April, when the tax rules changed[10]. This suggests that the housing market may continue to show resilience despite the changes in stamp duty rules.
In June, 64,200 mortgages for house purchase were approved, which is broadly in line with the pre-pandemic average[5]. The interest rate on a typical five-year fixed-rate mortgage is around 4.3% for a borrower with a 25% deposit[5]. This mortgage rate is three times more than the all-time lows of autumn 2021, but less than the highs of 5.7% reached in late 2023[5].
The Bank of England will be voting on whether or not to increase or cut interest rates next Thursday[11]. The outcome of this meeting could potentially further influence the housing market and the house price to earnings ratio.
[1] Nationwide's House Price Index (July 2023) [2] Nationwide's House Price Index (June 2023) [3] Robert Gardner, Nationwide's Chief Economist (2023) [4] Office for National Statistics (2023) [5] Bank of England (2023) [6] Robert Gardner, Nationwide's Chief Economist (2023) [7] Jeremy Leaf, North London Estate Agent (2023) [8] Riz Malik, Director at R3 Wealth (2023) [9] Bank of England (2023) [10] Zoopla (2023) [11] Bank of England (2023)
- The moderation in house price growth and improved mortgage conditions have led to a decrease in the house price to earnings ratio, making personal finance and investing in real-estate more feasible for many people.
- The continued strength of the labor market and stable household financial health have further supported the affordability of mortgages and the housing-market overall.
- The Bank of England's decision to cut interest rates could potentially lead to further improvements in the housing-market and continue the downward trend of the house price to earnings ratio.
