Housing affordability in the “new normal” property market

Adrian Gill

Adrian Gill

Non-Executive Board Member

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How will the property landscape look towards the end of 2021? It is a tough question to answer given the continually evolving COVID response and the opaqueness with which the government has addressed concerns in the property industry over the upcoming stamp duty cliff edge – although if the rumour mill runs true that can may be kicked down the road at this Wednesday’s Budget if the government presses ahead with an extension of the Stamp Duty holiday.

What is simple to answer is whether house prices are likely to become more affordable any time soon. The quick and easy response is predominantly, no. But that is not to say that home ownership is about to become more inaccessible. Indeed, the return of 95% mortgages reportedly set to appear in Wednesday’s budget could help prospective buyers get on the ladder. Nonetheless, affordability remains a concern for buyers, particularly in cities, which have borne the brunt of rising house prices.

Affordability in an expensive nutshell

The Open Property Group (OPG) released their 2021 House Price Affordability Index two weeks ago, offering a somewhat painful look at the top 10 most and least affordable cities to buy a house in the UK. The release coincides with the same-day publication of the latest official figures from the Office for National Statistics ONS), revealing that house prices in 2020 increased by a whopping 8.5% – good news for homeowners, bad news for first-time buyers.

The correlation between house prices and affordability is hardly chalk and cheese. According to the OPG research, average property prices in UK cities in 2021 would need to drop by approximately 44% to be affordable for a single person earning an average income, which is significantly up from the 37% registered in the OPG 2019/2020 Index. The accompanying OPG press release goes on to estimate that for a UK worker earning an average annual income of around £32,320, average house prices would have drop by just over £100,000 to be affordable, with the average UK house price sitting at £252,000 as last reported by the ONS.

There are some interesting highlights in the OPG research, not the least that the only city that is considered affordable for average-income buyers is once again Durham in pole position, with average prices there at £109,180 – so not so much the most affordable city as the only affordable city. However, house prices in Durham have crept up, and the city’s margin for affordability is now at -8%, up from -16% in 2020, so who knows where it will be next year. The remainder of the top 10 most “affordable” cities has changed little, albeit with some minor shuffling, Stoke-on-Trent retains its second place with house prices 2% above affordability, and Sunderland has crept up to third place with prices 6% above profitability. More worryingly is that house prices outside of the top three have increased and would have to come down by double-digit percentages to be affordable.  

Over in the top 10 least affordable cities listing is where things really start to get disproportionate. Heading up the pack is the City of Westminster – the crown jewel of the capital has scrapped its way past second position last year to command the most unaffordable residential properties in the UK, requiring a 69% drop in prices to be considered affordable. Affordable house prices based on average earnings in the capital put the affordability price range at £279,085, but with average house prices in the City of Westminster sitting at £910,948, it really shows how stark the divide is. Chichester has leapt to second place from fifth last year, requiring a 68% drop in house prices to be affordable. Oxford, the former first-place income cruncher, now sits in third, also however with house prices a lofty 68% above the affordability of average incomes for the city.

The list of least affordable cities really does not get much more comforting as properties get “more affordable” and serves as a reminder that affordability for first-time buyers looking to get on the ladder is becoming much more out of reach. Adjacent to the issue of rising house prices and affordability however is the means to pay for them.

The race between house prices and income

The ONS now puts the average median pay for full-time workers at £31,461 for the tax year ending 5 April 2020 as last reported, with the average annual income up 3.6% on the previous year. This increase in itself is a middling rise compared to the soaring average house prices of 8.5% over the past year – and the ONS is keen to note that annual income estimates for the previous year have been largely unaffected by COVID.

However, what really puts the pain in perspective is where the ONS data demonstrate that between financial year ending (FYE) 2011 and FYE 2020, median household income only increased by 7%, which after adjusting for inflation equates to an average increase of 0.8% per year. The fact that average house prices increased more in one year than median annual incomes over nine should be a significant cause for concern for people trying to get on the ladder.

If average incomes increase more in line with inflation and house prices, then property might become more affordable. This would certainly make it easier for buyers to have a wider range of options on properties, it should therefore also translate into more business for agents – a win win for property market stakeholders.

Homeownership in the “new normal”

There are signs that the government is endeavouring to make homeownership more accessible – the return of 95% mortgages in Wednesday’s Budget will hopefully also mean greater buying power for people on smaller deposits to get on the ladder. Nonetheless, it may just precipitate a further rise in house prices.

Ultimately, any support that helps more people get on the ladder is fundamentally good, but if house prices continue to rise unabated it only worsens the affordability crisis for future generations of homebuyers and not everyone can rely on the Bank of Mom and Dad to get a leg up. Financial vehicles like low-deposit mortgages are great but further efforts could be made to make housing more affordable – if not to bring house prices down (which would be unpopular to current homeowners certainly) – whether it is comes by rapidly expediting residential development of low-cost stock or through raising average income growth above the annual growth of property values as possible outcomes. At the end of the day, greater equilibrium in the housing market would be good for everyone. 2021 does offers challenges to the property market, with pent-up demand likely to abate after the end of Stamp Duty holiday. Nonetheless, there is an opportunity for the government to catalyse the market with bold decision-making that could make homeownership in the “new normal” more accessible and affordable.

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