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Home prices are the most expensive in nearly 150 years relative to median incomes, a new study finds.
The average home in the UK currently costs 9.1 times median income, according to a report from wealth management company Schroders. The in-depth study looked at real estate prices all the way back to 1845 and said the last time they were this expensive was in 1876.
The report says house prices have risen dramatically above revenues in recent decades, with the pandemic only adding to the real estate inflation problem.
Housing in the UK is now less affordable than at any time in 147 years. But higher interest rates could change that.
House prices have risen from about four times median income in the mid-1990s to where they are today.
Falling interest rates are believed to have been the main driving force behind this dramatic change.
Perhaps unsurprisingly, some parts of the country are even more expensive relative to revenue. For example, the average house in London now costs 12 times the average wage in London.
Properties in the South East and South West are also expensive, impacted by commuters living in those areas but working in London, the demand for real estate from people moving for work – and in the South West particularly affluent retirees.
However, real estate becomes more affordable as you move further north in the country.
The Midlands cluster has house prices around 7.5 times median incomes, while the North West and Yorkshire, along with Wales, are around 6.5 times that.
In Scotland, the average house costs about 5.5 times the median income, the lowest of the major UK regions.
What is more surprising is that this regional divergence is a relatively recent phenomenon, according to Schroders.
In the three decades leading up to the mid-1990s, there was relatively little difference between different parts of the country.
In the three decades leading up to the mid-1990s, there was relatively little difference between house prices and incomes in different parts of the country.
Why are house prices unaffordable?
Most mortgage lenders adhere to affordability guidelines that limit how much they’re willing to borrow, but that hasn’t stopped home prices as low interest rates allow people to borrow more.
Nearly all of the rise in average house prices relative to incomes between 1985 and 2018 can be seen as the result of a fall in real interest rates, according to Bank of England research cited in Schroders’ report.
House prices have risen from about four times median income in the mid-1990s to where they are today.
Duncan Lamont, head of strategic research, said: “House prices may have been high relative to incomes in recent years, but low interest rates have kept mortgage payments relatively affordable, even for people who borrow large amounts.
“The challenge wasn’t the monthly payment, but getting your hands on the down payment. With mortgage rates skyrocketing, that era is now behind us.
‘At a mortgage rate of 2 per cent, the monthly repayment of a £300,000 property bought with a 10 per cent down payment and a repayment term of 25 years would have been £1,144.
‘At 6 per cent it would be £1,740, more than 50 per cent more. Potential homebuyers must find more money, adjust their expectations or prices must fall.
“Approximately, in the above example, it would take a price drop of about 30 percent to make monthly payments comparable to before.”
Mortgage rates peaked in the fall of 2022 due to the post-mini-budget economic chaos, although they have fallen in recent months.
How can affordability improve?
The last time there was a sustained decline in the house price-earnings ratio was in the second half of the 19th century.
Average house prices fell for more than 50 years thanks to the heavy construction of houses, many of which were smaller than before. At the same time, revenues increased.
What happened between 1851 and 1911? House prices followed a multi-decade downward trend relative to income. This low point only came after the First World War. There are three main drivers for this: more houses, smaller houses and rising incomes.
Schroders’ Duncan Lamont believes that a period of stronger wage growth may be the only viable solution.
While regular wages, excluding bonuses, have lagged inflation, they have grown at their fastest pace in more than 20 years, according to the latest ONS figures.
Average wages were up 6.7 percent from the previous year in October through December 2022.
Home ownership has fallen to 63-65% over the past five years, a level last seen in the early 1980s.
Lamont says: ‘The UK’s heavily mortgaged consumers would struggle to cope with 50 years of falling house prices.
It would also be political suicide for whoever is held responsible. A shift to building smaller houses also seems unlikely – research has shown that houses today are smaller than at any time since the 1930s.
‘Hobbit houses can’t be completely ruled out, but I’m not sure how positive that would be.
“As a result, we are lagging behind with income. Earnings growth has been weak since the financial crisis, but has recently picked up strongly, at least in nominal terms.
“A period of stronger wage growth may be the best hope for improving affordability – at least by this measure.”
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