In many ways, this is one of the best times for buying a property in Britain.
While prices continue to rise at a staggering pace, particularly in London, the actual affordability of property is close to record lows.
HSBC’s chief economist Liz Martins produced the below graph in a note sent to clients last week showing that mortgage repayments as a percentage of pre-tax income has fallen since the crash to levels below the early 2000s.
On average, 10% of your pay cheque goes to paying off the house if you’re a first-time buyer and just 8% if you’re already on the ladder. That’s because interest rates are close to zero and have been since the crash, which reduces mortgage rates.
Evening Standard columnist Simon Jenkins noted in a piece on Tuesday just how unusually low this is, recalling the repayments his first property in London:
I bought my first studio flat in the Seventies and it cost four times my starter salary. The 85 per cent mortgage cost 17 per cent. It consumed 40 per cent of my income and was crippling. That same job today also buys a studio flat at the same multiple. But the mortgage is four per cent, which consumes a mere 15 per cent of income.
But the picture is not quite as rosy as all that. While it’s true that paying off a property is as cheap as its ever been, there’s still a significant hurdle that keeps many people out of the market — the deposit.
The average deposit hit a record high of £80,000 in December, according to The Telegraph, with buyers forced to put up more cash to secure a mortgage.
More charts from Liz Martins show just why it’s rising. First, the ratio of average property prices to average earnings has risen for 11 consecutive quarters now:
But, while it’s rising, the average ratio of mortgage size to incomes isn’t keeping up. It’s now just over 3X average earnings for home-movers, compared to house prices, which are just over 5X average earnings.
That means buyers have to put down a much bigger deposit to make up the shortfall between what they can borrow and the cost of the actual house.
But, as I noted in a recent piece, many first-time buyers — and indeed many already on the housing ladder — are caught in a Catch-22 whereby depressed interest rates and wage growth mean they will struggle to save the required deposit without help from rich relatives.
That’s because property prices are rising faster than earnings and investments, meaning the goal they are reaching is getting bigger faster than they can grow their savings.
All of this points to inequality in the house market. Only the well-off can really afford to get on the house ladder, where it’s more affordable than ever, but for the majority of people it’s a goal that’s out of reach.
Property agent Savills penned a recent report backing this up, saying Britain’s housing market only works for the rich because average prices are so dislocated from average earnings.
The government’s recent housing reforms haven’t done much to address this imbalance. Evening Standard’s Jenkins dubs policies such as Help-to-Buy “wealthfare” spending — they help the already well-off by speeding up the time it would take for the middle and upper classes to get on the housing ladder.
In London, the problem of affordability is an order of magnitude bigger, as the below chart from HSBC’s Martins shows. Average prices are now over 10x higher than average earnings, making saving for a deposit a huge task.