Gap between average wages and house prices grows

New figures highlight the huge and growing gap between average earnings and house prices in some parts of the country and show how difficult it is for first-time buyers to make their first move onto the housing ladder.

Housing data consultancy Hometrack said that a lack of supply allied with strong demand for property in London has pushed prices in the capital up by 86% since 2009 to an average of £482,800 and taken the house price to earnings ratio to 14.2 times in London, meaning the cost of the average home is 14.2 times the cost of the average salary of £33,720.

Surprisingly, the study also showed that the annual rate of house price inflation in London is at a three-year low of 9% and is expected to slow further due to high prices, the impact of stamp duty taxes on second homes and buy-to-let tax changes.

However the ratio in London is still more than double the average UK ratio of 6.5 times and the highest ever recorded. Cambridge and Oxford also have double digit house price to earnings ratios. Workers in Cambridge earn an average of £30,633 and have to find 13.8x that amount to buy a home in the city with average prices now at £420,600. Oxford residents face a similar situation with average salaries and house prices very similar.

Some cities are also pushing towards 10 times earnings. Bristol is the fastest growing city in terms of house prices in Hometrack’s index of 20 locations, with house prices now up to 9.2x earnings. Southampton and Portsmouth are also rising and have reached around 8x earnings.

However, the disparities in house prices in relation to earnings across different regions and cities in the UK means that three cities have price to earnings ratios that are below the average. They are Glasgow, at 3.7x, Liverpool at 4.4x and Newcastle at 4.8x. The average rate of house price growth of the 20 cities used for the study was 8.4%.

Richard Donnell, insight director at Hometrack said: “The impetus for house price growth is shifting from the affordability-constrained cities in southern England to cities in the Midlands and the north of England. Regional cities have more attractive affordability levels and house prices have significant potential upside for growth in the near term subject to the outlook for the economy.

“In cities where affordability levels are stretched fewer households are able to participate in the market and this reduces levels of turnover and leads to lower levels of house price growth. This process is underway in London where the annual rate of growth is close to its lowest level for three years and where the top end of the market is already registering falling prices.”

The gap between earnings and house prices inevitably means there are fewer overall transactions in the housing market and also potential homeowners are having to consider moving to other parts of the country where prices are lower and the earnings to price ratio is lower. This pushes up prices in cities like Liverpool, Leeds and Manchester, where, Donnell said he expects to see house prices rise strongly.

On Wednesday the Chancellor, Philip Hammond, pledged £3.7bn of new funding to help support the construction of 100,000 new homes in areas that need them most and 40,000 affordable homes to try and tackle the problem.

Even though mortgage rates are at record low levels, making it cheaper to have a mortgage, fewer people are being approved for a loan. Figures published yesterday by the British Bankers’ Association show that mortgage approvals are down 10% on the same period last year.