Two charts emailed out in a research note from HSBC economist Liz Martins paint two different and interesting pictures of the UK housing market right now.
Everyone knows the UK housing market is extremely expensive, but that’s not the whole story.
Here’s the first chart. If you look at mortgages in comparison to average incomes, the ratio has never been higher for home movers, and is near record highs for first-time buyers.
That’s the story that everyone knows, and it’s clear that the actual size of the mortgages required is very high. Back in the late 1990s, the ratio was just over two, while it’s now over 3 for both groups — consuming another year of annual income.
But that’s not the whole story.
Because according to the second chart, it seems that one aspect of paying to a house has never been cheaper:
Monthly mortgage payments have gone through the floor. It’s not a small change. Interest payments are now less than half what they were as a proportion of pre-tax income just before the 2008 financial crisis happened.
That’s largely down to a concerted effort by the Bank of England to bring down interest rates and stimulate demand. Cutting mortgage interest payments effectively gives homeowners a boost to their disposable income. They have even declined noticeably while the BoE has kept them at 0.5%. For home movers, payments have fallen by more than 3 percentage points of their pre-tax income since 2010.
It’s also a good way of showing what a serious impact a hike in interest rates could have on the economy. A few percentage points of a home-owning household’s pre-tax income can add up to hundreds of pounds, which is then not available for them to spend. That crunches down on demand, and it’s a serious consideration for the Bank of England.
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