The gap between UK house prices and earnings has narrowed to its lowest level in 11 years – but higher mortgage rates are limiting the benefit for buyers.
The average home now costs 7.3 times average earnings, down from 7.6 a year ago and the lowest ratio since 2015, according to research from Lloyds.
Average property prices increased by just 0.5% over the year to £299,131, while earnings grew by 4.5% to £40,790.
But average monthly mortgage repayments have moved in the opposite direction, rising £57 from £1,100 to £1,157 as higher borrowing costs offset some of the improvement in price-to-income affordability.
FIRST-TIME BUYERS
The affordability ratio for first-time buyers has also fallen to an 11-year low.
A typical first home costs £239,681, up just 0.3% over the year, pushing the house price-to-earnings ratio down from 6.1 to 5.9.
However, a buyer using a 10% deposit would still need to find almost £24,000 upfront, while Lloyds calculates average first-time buyer mortgage repayments have increased from £1,100 to £1,150 a month.
Wage growth means those mortgage payments continue to account for around 34% of average monthly income, compared with 41% for renters. Average rents increased 3.2% over the year from £1,339 to £1,382 a month.
Andrew Asaam (main picture, inset), Mortgages Director at Lloyds, says: “There are some encouraging signs for people looking to buy a home. Wages have continued to rise while house prices have remained relatively stable, helping to narrow the gap between earnings and house prices.
“However, affordability remains stretched for many households. Mortgage rates are higher than they were a year ago and saving for a deposit continues to be one of the biggest barriers facing first-time buyers.”
REGIONAL DIVIDE
Some of the largest improvements have occurred in traditionally expensive housing markets.
The South East’s house price-to-income ratio has fallen from 9.7 to 9.1, while Greater London has dropped from 10.9 to 10.3.
Eastern England has improved from 8.7 to 8.2 and the South West from 8.2 to 7.7, although London and the South East remain the two least affordable regions.
Northern Ireland is the only nation or region where the ratio has worsened, increasing from 5.8 to 6.0 after house prices rose 7.4% against earnings growth of 3.7%.
AFFORDABILITY HOTSPOTS
Inverclyde and Aberdeen are Britain’s most affordable local authority areas relative to earnings, with average homes costing 3.5 times earnings.
Kingston upon Hull, Blackpool and Dundee follow at 3.6 times earnings.
At the opposite end of the market, Elmbridge in Surrey has a ratio of 17.4, narrowly ahead of Kensington and Chelsea at 17.3 and St Albans at 14.1.
Some expensive areas have nevertheless recorded substantial improvements. Westminster’s ratio has fallen from 15.2 to 13.3 and Cambridge from 11.4 to 10.0.
Asaam adds: “Where you buy continues to make a huge difference to affordability.
“For first-time buyers in particular, a small shift in location could make a big difference – not just in getting on the ladder, but in what kind of property is within reach.
“Many parts of Scotland and northern England continue to offer some of the best value relative to local earnings. For buyers with flexibility over where they live, that can make a meaningful difference to what they can afford.”
FIRST-TIME BUYER CHALLENGE
Ian Harris, President of NAEA Propertymark (National Association of Estate Agents), says: “While the narrowing gap between house prices and earnings is encouraging, affordability on paper does not always translate into affordability at the point of purchase.
“Buyers are still facing higher borrowing costs and the challenge of raising a deposit, with many having to compromise on property type, location or budget.
“Location also remains crucial. Widening a search can unlock better value, but moving further from work, family, schools and support networks can bring additional costs and practical considerations that headline affordability measures don’t capture.
“For first-time buyers in particular, the challenge is not simply finding a property that looks affordable relative to earnings, but securing a manageable mortgage, raising a deposit and finding a home that works for everyday life. The latest figures show progress, but affordability remains a careful balancing act for many households.”
Tom Bill, Head of UK Residential Research at Knight Frank, adds: “The house price gap between London and the rest of the country continues to narrow as more affordable parts of the country see stronger growth.
“Eventually, demand will gravitate back towards the capital and south-east England when the discount gets small enough, re-starting the cycle.
“The recent mortgage rate spike has only just begun to hit, which will keep a lid on activity and prices for the rest of this year, something that will affect highly-leveraged borrowers, like first-time buyers, hardest.”
