Data shows that the cost of a home in Britain is now more than seven times the average income, putting housing affordability under the most strain it has ever seen.
Since the start of the pandemic, property prices have increased by 16.8 percent while average incomes have increased by just 2.7 percent, according to Halifax.
In the first three months of the year, the cost of a typical home was £279,431, while the average annual income for a full-time worker was estimated at £39,402.
This puts the home price to income ratio at 7.1, the lowest it can ever be.
Despite the rise in average house prices, there is still a lot of disparity between prices across different regions of the UK
At the start of 2020, the average income in the UK was £38,374 and the median house price was £239,281 according to Halifax, resulting in a house price to income ratio of 6.2.
Despite this price hike, demand for homes remains strong. Last year saw numbers of first-time buyers rise at a record rate – up 35 per cent – to an all-time high of 409,370.
However, the price hike is affecting those who are trying to get up on the real estate ladder. Data shows that 26 per cent of first time buyers, now pay stamp duty, suggest they are shelling out more than £300,000 for their homes.
Meanwhile, the Bank of England is scrapping a key part of its affordability stress test that makes lenders hold back borrowers’ money for their record high variable rates plus 3 per cent.
However, while the stress test will be eliminated, the loan’s “flow limit” to income will continue.
This is the multiple at which banks will lend based on someone’s annual salary.
This means that banks will continue to cap the number of mortgages they can offer where someone borrows more than 4.5 times their salary.
Home price inflation continues to outpace rising wages, sending the unaffordability ratio to record levels.
Halifax Mortgage Director Andrew Assam said: “There is no doubt that the economics of buying a home have changed dramatically over the past couple of years.
Rising property prices and slowing wage growth have combined to broaden traditional measures of housing affordability.
However, we also know from strong transaction levels that demand has remained very strong over that period, both from movers looking for larger properties, and from first-time buyers taking their first steps on the ladder.
With interest rates rising as a way to combat inflation, home prices are unlikely to continue growing at the pace we have seen recently. That should see the gap between median income and real estate prices narrow over time.
“It is also important to highlight the responsible approach to mortgage lending in this environment, with lenders carrying out thorough checks to ensure that repayments can be made even if interest rates rise more sharply in the future.”
The increase in house prices has led to a spike in first time stamp duty payments, meaning more are paying over £300.00 for their homes.
While average affordability rates have risen nationally, there are stark regional differences in home prices.
The South and East of England continue to be a large proportion of the least expensive local areas to buy a home.
In the center of the capital, Westminster and the City of London have the largest affordability gap, with average prices 14.5 times the average income.
This, however, is an improvement. The ratio of earnings to home prices in these areas was 16.8 at the beginning of 2020.
At the other end of the scale, the list of most expensive localities has been dominated by Scottish locations. Located in the west of Scotland, Inverclyde is the most affordable place to buy a home, with a typical average income of just 3.1 times.
Pembrokeshire, Wales, has seen the biggest deterioration in affordability over the past two years, with buyer demand rising in rural locations offering more space.
The home price-to-earnings ratio has increased from 4.3 at the start of 2020, to close to the national average of 6.9.
Rachel Springol, financial expert at Moneyfacts, said: ‘Aspiring landlords will know that affordable housing is seriously under-supplied right now, and this is unlikely to be corrected anytime soon.
A significant increase in the choice of affordable housing would be needed to make a noticeable difference to supply issues.
“Home prices are rising and are unlikely to slow in the short term – meaning potential buyers may find they need to wait longer to build up a deposit.”
Discussing the dilemma of first-time buyers, David Hollingworth of L&C Mortgages said: ‘The question is twofold, will I be able to borrow enough, and can I save enough on deposit to make up enough of the difference between the mortgage and the buyout? price?
“The unexpected boost given by the pandemic to housing moved prices away, the only upside was that people were saving more but of course we went into a short shift there with the cost of living crisis so nothing seems to be getting easier.
“There’s not a lot of real estate available so the mismatch with demand has supported and boosted prices over the last year or so.”
However, he says there are options available. While Help to Buy is due to end in March next year, there is still plenty of time for buyers to make the most of the savings it offers.
Moreover, most lenders are now offering what looks like a 5 percent mortgage.
Hollingworth also suggests that while the government is unlikely to abolish the stamp duty, an increase in first-time buyers paying the tax should lead to a review of scope for the collection so more people can take advantage of the tax break.
Best mortgage rates and how to find them
Mortgage rates skyrocketed as the Bank of England’s base rate rose rapidly.
If you are looking to buy your first home, move or remortgage, or are a buy-to-let owner, it is important to get good mortgage advice from a broker who can help you find the best deal.
To help our readers find the best mortgage, This is Money has partnered with an independent, no-fee L&C broker.
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