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PF Blog: House prices continue to rise – but if you are on the housing ladder, mortgages are affordable

Written by Martin Upton

Friday 30th October 2015

The latest figures from Nationwide Building Society show average house prices in October 2015 were 3.9% higher than in October 2014. House price inflation has eased over the past year and at 3.9% the rate of inflation is close to the current rate of earnings inflation. 
 
However, with prices still rising those struggling to get onto the housing ladder face a growing challenge to amass the deposits needed to secure a mortgage and to get an advance of funds sufficiently high to buy a property. 
 
With housing supply not keeping pace with demand, this struggle is set to continue – particularly in the South-East. The Land Registry’s data show that the average price of property in London is now close to £500,000 – compared with the average for the UK of £196,807. 
 
Nationwide’s data also show that, from the early 1980s until 2003, house prices were no more than 4-times household earnings of first-time buyers; for much of the time it was below 3-times earnings. Now it is 5.1-times average earnings. No wonder owner-occupancy has fallen from nearly 70% to 65% of households since the early 2000s. 
 
On a more positive note, those first-time buyers who have managed to secure a mortgage and buy their own property are finding that mortgages are affordable. The current historically low mortgage rates mean that mortgage payments for first-time buyers are 35% of mean take home pay – close to the historic average and lower than in the mid- and late-1980s and early 1990s. This will change, of course, if interest rates rise in the coming years as forecast by the markets.
 
Of course the story is different in London given the faster rate of house price growth – here mortgage payments average 65% of mean take home pay – not far off double the national average and 15% higher than 5 years ago.
 
Is there any prospect of material change to this challenging scenario for those trying to get a home of their own? The likelihood, sadly, is no.  Housing supply will not keep pace with demand particularly if the Office of National Statistics (ONS) forecast, published on 29th October, of a 4.4m increase in the UK’s population by 2025 prove accurate. 
 
Extending the right-to-buy to the social housing sector, as currently proposed by the Government, is likely to have little material impact other than to raise rents by diminishing the number of properties available to those looking to rent.
 
For some families, the use of equity release products or downsizing by ageing parents may provide the funds for their children to make the step from renting to buying property. But these options are not open to all households and equity release products are costly and inefficient ways to release wealth held in properties.
 
I wish I could be more positive but my best guess is that owner-occupy households will continue to roll back in the UK in the coming decades and that millions of the younger generation will see renting to be the norm rather than owning property.
 
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)
              

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