Interactive Investor

interactive investor comments on ONS housing purchase affordability data

28th July 2022 11:21

Myron Jobson from interactive investor

Mortgage affordability is a growing hurdle, but the axing of a key stress test from August offers respite.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Homes in England are the least affordable they have been since records began before the turn of the millennium.

“While affordability ratios for the average home in Wales and Scotland are below their peaks in 2007 and 2008, respectively, England has seen a bigger increase in the housing affordability ratio over the longer term by the end of March 2021, the latest data available – nearly doubling since 1999.

“The average home in England cost £275,000, the equivalent to a ratio of 8.7 years of income by the end March 2021. Mortgage affordability has become a growing hurdle since then.

“In recent times, a pandemic-induced slowdown in housebuilding and wages that haven’t kept pace with house prices growth, fuelled by supply and demand mismatch, has exacerbated affordability pressures.

“The decline in housing affordability depicts a property market that has become increasingly difficult for first-time buyers to access. Soaring house prices, rising mortgage rates and the cost-of-living squeeze has forced many to give up their dream of home ownership – at least for the time being. The Bank of Mum and Dad is also facing its own cost-of-living challenges and can’t be relied on to provide much-needed financial support.

“While the current pace of price appreciation doesn’t appear sustainable over the long run, would-be buyers shouldn’t hold their breath for a house market crash to ease the affordability squeeze. The evidence points to house prices dampening rather than tumbling as laws of supply and demand will continue to prevail.

“However, the withdrawal of a key affordability stress test, introduced in 2014 in the aftermath of the financial crisis, from next month will offer some form of respite to those struggling to get on to the property ladder and homeowners looking to take the next step. The axing of the test means a typical borrower will no longer be assessed on whether they could continue to repay the loan even if, hypothetically, their borrowing rate was to increase.

“However, unwinding the measure amid the cost-of-living crisis could run the risk of people biting off more than they chew financially to purchase a property – although the Bank of England claims the stress test caused just 6% of borrowers to take a smaller mortgage than they otherwise might have.”

Key points:

  • The Office for National Statistics has today published data on ratios of house prices to equivalised household disposable income deciles.
  • In the financial year ending 31 March 2021, the average home sold in England cost the equivalent of 8.7 times the average annual disposable household income, while in Wales the ratio was 6.0, and in Scotland it was 5.5.
  • In England, £275,000 for median house price and £31,800 for median income, which is equivalent to a ratio of 8.7 years of income.
  • While purchase affordability ratios for the average home are below their peaks in Wales (2007) and Scotland (2008), affordability ratios in England are worse than at any point since the series began in 1999.
  • Key affordability stress test will be scrapped from August.

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