According to one of the UK’s major building societies (mortgage lenders), the price of the average UK home rose by 8.4% over the year, taking it to £175826 (there are very significant regional differences, of course, with properties in London and the South East of the country very much higher). Given that average wages in the UK are in the region of £26000 (before tax), the average house now costs more than six times average income. In the good old days, a borrower could secure 3x their income or 3.5x joint income to purchase a house. With the upwards march of house prices, these limits have been relaxed in recent years to as much as 5x income, and some mortgages were “interest only” where repayments never were intended to cover the purchase price of the property, but the crisis has trimmed deals back to a typical ratio of 3x earnings and a requirement for a significant deposit.
UK earnings in 2013 grew by 1.7% in 2013, according to the Office for National Statistics; meaning that the rate of house price increase outstripped earning increase by more than a factor of four. Analysts in some quarters are warning of a UK property bubble and concern has been laid at the door of a government scheme to help individuals find the deposit for buying their home – but since this scheme has only helped 750 individuals so far, it is yet to become the doomsday device that some suggest.
The Bank of England base lending rate is the yardstick used to set mortgage interest rates and it has been at a record low of 0.5% since March 2009. Mortgage rates with limited time fixed rate components tend to be in the range of 2 to 3.2% with fix durations of (typically) 2 years to five years. Whilst most analysts agree that the Bank of England will follow its forward guidance and leave rates on-hold in 2014, everybody agrees that they will rise over time. As that happens, individuals’ abilities to meet their debt obligations will be squeezed – unless pay rises substantially – and a housing bubble that government is keen to deny exists, may burst.
The consequences of a catastrophic housing market bubble bursting can be seen, all too clearly, in the recent histories of Ireland and Spain. Whilst nobody is (yet) suggesting that the UK housing market could collapse in so spectacular a fashion, clearly there needs to be a balance between aspirations of home ownership; average earnings; the house price and the costs of home acquisition.