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Rent or buy? The challenge of access to housing
Rent or buy? The challenge of access to housing

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2.7 Housing affordability in the UK

With the focus now on the UK, now you will explore a range of measures of housing affordability to see if UK house prices are ‘too high’.

Figures 7−9 show three different measures of affordability for two different types of buyer: first-time buyers who are more likely to be from younger generations; and existing homeowners who will typically be older. The three measures are:

  • House price-to-income ratio (Figure 7). Unlike Figure 6, this is the actual ratio itself not an index relative to the long-run average. The ratio shows by how many times house prices are higher than the annual gross income of buyers. For example in 2016, on average first-time buyers homes cost 4.5 times the amount of their annual income.
  • Deposit as a percentage of the house purchase price (Figure 8). For example, in 2016, existing owners on average put down a deposit equal to 35% of the purchase price of the property. (The remaining 65% was provided by a mortgage loan.)
  • Proportion of household income spent on mortgage repayments (Figure 9). For example, in 2016, first-time buyers spent 17.5% of their gross income on mortgage payments. A common ‘heuristic’ (meaning a rule-of-thumb or mental short-cut) is that households should spend no more than 30% of their disposable income on total housing costs (mortgage or rent, regular property taxes and home insurance) but of course individual households may have to, or choose to, spend more.

When looking at Figures 7−9, it’s important to bear in mind that you are looking at data only for people who have bought homes. Trends in the data are useful as an indicator of how affordability has changed over time. However, they do not tell you anything about the number of households who may have wanted to buy a home but have been squeezed out of the market by rising house prices.

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Figure 7 UK house price-to-income ratio, 1988–2016. Source: authors’ chart based on ONS (2017), Table 30.
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Figure 7 is a line chart. The horizontal axis shows years which run from 1988 to 2016. The vertical axis is labelled ‘House price-to-income-ratio’ and runs from a value of 0 up to 6. There are two lines on the chart, one for each of the two groups of owners: first-time buyers and existing owners. The line for first-time buyers starts at about 3 in 1988 and remains fairly stable until 2001 at which point it rises sharply to reach about 4.5 in 2004 and remains at that level until 2016 (with a small glitch down to 4 in 2006). The line for existing owners starts higher at 4 in 1988 and goes slightly down to 3.5 in the mid-nineties then back to 4 in about 2001 after which it too rises sharply to reach a peak of 5.5 in 2004 and remains just above 5 all the way to 2016.

Figure 7 UK house price-to-income ratio, 1988–2016. Source: authors’ chart based on ONS (2017), Table 30.
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Figure 8 UK deposit as a percentage of house price, 1988–2016. Source: authors’ chart based on ONS (2017), Table 30.
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Figure 8 is a line chart. The horizontal axis shows years that run from 1988 to 2016. The vertical axis is labelled ‘Deposit as % of house purchase price’ and runs from a value of 0 up to 45%. There are two lines on the chart, one for each of the two groups of owners: first-time buyers and existing owners. The line for first-time buyers starts at about 12% in 1988 and rises slowly to 15% in 1993 then falls to 10% in 1996 after which it rises more sharply to reach a peak of 23% in 2003. It falls back to just above 15% in 2006 then rises again much faster to reach another peak of 27% in 2009-10 and falls steadily afterwards to 20% in 2016. The line for existing owners starts much higher at 35% in 1988 and stabilises down to about 30% in most of the nineties the rises from 2002 to a peak of almost 40% in 2010 after which it falls again back to 35%.

Figure 8 UK deposit as a percentage of house price, 1988–2016. Source: authors’ chart based on ONS (2017), Table 30.
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Figure 9 UK mortgage payments as percentage of income, 1988–2016. Source: authors’ chart based on ONS (2017), Table 30.
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Figure 9 is a line chart. The horizontal axis shows years which run from 1988 to 2016. The vertical axis is labelled ‘Mortgage payments as % of income’ and runs from a value of 0 up to 30%. There are two lines on the chart, one for each of the two groups of owners: first-time buyers and existing owners. Both lines follow a very similar pattern with the line for existing owner being slightly below that of the other group in more recent years. The line for first-time buyers starts at about 20% in 1988 and peaks at 28% in 1990 after which it falls dramatically back to 17-18% by 1993 and stays at that level for ten years. In 2002it rises again to reach 24% in 2007 then falls again to stabilise at 17-18% from 2009 onwards. The line for existing owners follows a very similar pattern of ups and downs but stabilises at a lower value of around 16% from 2009

Figure 9 UK mortgage payments as percentage of income, 1988–2016. Source: authors’ chart based on ONS (2017), Table 30.

Activity 5 Comparing affordability measures over time

Timing: Allow about 30 minutes

Based on Figures 7 to 9, write two paragraphs:

  • a.the first comparing the three measures of housing affordability in the UK for first-time buyers and existing owners over the period 1988 to 2016.
  • b.the second giving your conclusion, based on the evidence in the charts, on whether UK house prices are ‘too high’.
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Discussion

There are many different paragraphs you could write, but here is an example of the points you are likely to have included:

  • a.There was a marked upward shift in the house price-to-income ratio from 2004 onwards, affecting both first-time buyers and existing owners, suggesting that UK homes became less affordable. Deposits as a percentage of purchase price have not changed greatly over the period for existing owners, but have generally increased for first-time buyers reaching a high of about 28% in 2009 before falling back to 20% in 2016. By contrast, mortgage payments as a percentage of income, while higher for first-time buyers than existing owners, have fallen for both groups over the period.
  • b.The evidence from Figures 7 to 9 suggests that house prices have increased relative to income over the last decade or so and that first-time buyers are having to find larger deposits than in the past before they can get on the housing ladder. However, once they have made the purchase, the cost of their monthly mortgage payments is more affordable than in the past.

It’s important to bear in mind that the data describe the average experience of first-time buyers and existing homeowners. For example, they tell you nothing about regional variations. However, using these national averages, you might be wondering how mortgages can be more affordable even though house prices have risen. It’s this topic you will turn to next.