Official statistics show that housing affordability in England and Wales is back to pre-pandemic levels, mainly due to wages rising much faster than real estate prices.
The median value of houses in England stood at £290,000 as of 2023, or 7.7 times that of a full-time worker’s median income. This is a reduction from 2021 high of 9.0, as per Office for National Statistics (ONS) numbers, and relatively lower compared to 2019’s 7.9.
In spite of the better affordability in terms of the price-to-income ratio, most families have not yet experienced the improvement because of the rise in mortgage rates over recent years. But this change in affordability gives a better picture for potential buyers who need to prove their income compared to property prices.
Lucian Cook, head of residential research at Savills property company, reacted, saying, “It provides a platform for [house price and sales] growth as those rates come down if you have had an easing in the underlying affordability.
The affordability ratio increased substantially between the years 2020 and 2021 as interest rates were reduced to record lows and the government provided tax incentives to homebuyers. These actions spurred a surge in property demand, which pushed house prices against incomes.
But since 2021, housing prices in England and Wales have recorded just a 1 percent increase, while mean earnings have risen by 20 percent. The quickening inflation and interest rate surge over the same period has resulted in muted house sales and plateauing property prices, as wages have increased by much more.
At the beginning of 2020, just before the COVID-19 pandemic hit, average mortgage rates were about 2 percent. Fast forward to the present, and they have risen to about 4-5 percent. Consequently, the affordability tests and monthly mortgage repayment costs for prospective homebuyers are far more difficult compared to pre-pandemic levels.
The rise in mortgage costs has affected families over time, since numerous homeowners were stuck with fixed-rate mortgage agreements that only recently started to expire.
Cook noted that numerous borrowers are still preparing themselves for financial pressure, adding, “There are still a substantial number of households that are set to reach the end of five-year fixed-rate deals later this year and will be confronted with an increase in their household bill.”
Nationwide data indicates that first-time buyers’ mortgage payments in late 2024 represented 37.7 percent of their after-tax income. Although this is lower than the 38.4 percent record set at the close of 2023, it is still considerably higher than the 27.7 percent seen in the fourth quarter of 2019, before the pandemic.
A separate report released by Savills on Monday highlighted that the average mortgaged homeowner is now paying £12,754 annually. This represents an increase of £2,829 compared to 2022, when mortgage rates began their upward trajectory.
When adjusted for inflation, the cost of housing across the UK reached its highest level on record in 2024, according to Savills. While housing affordability has improved compared to the peak levels seen in recent years, homes remain significantly less affordable than they were two decades ago. In 2004, the price-to-earnings ratio stood at 6.79, highlighting how much housing costs have outpaced wage growth over the long term.
Rented households are also struggling with increased housing costs, as rents have risen at an all-time rate over the last few years. Figures from property data firm PriceHubble, released by the ONS, show that new tenancies in February 2024 asked renters to pay 29 percent of their gross pay in rent. This is significantly higher than 25.8 percent at the close of 2019.
For those trying to break into the property market, the combination of rising rental costs and high borrowing rates pose ongoing hurdles. The reality of increasing borrowing costs means that a lot of households will remain feeling the bite, despite recent developments in affordability ratios indicating a step towards more acceptable conditions for buyers.
Much will depend on the movement in interest rates in the coming months. Potential buyers may be better off if borrowing costs fall because affordability metrics and the economy will be in sync to generate more housing market opportunities.
