There is no such thing as a perfect measure of housing affordability – after all no two homebuyers are the same. Some will be taking out enormous mortgages to part-finance their dream home. Others will be lucky enough to pay in cash. Some are buying as investment, others to live in the home.
However, perhaps the most broadly used measure is what’s known as the house price-earnings ratio. Very simply, you divide the average house price by the average earnings, and thereby learn how many years of a particular salary you’d need to buy a given home. While this doesn’t take account of the effects of interest rates, it at least gives you a yardstick against which to judge the expense or otherwise of a home.
It’s this metric that Mark Carney referred to this week when he told the Treasury Select Committee that although there were parts of the housing market that were picking up, across the country affordability levels remained relatively close to the levels in the early part of the economic crisis. The Bank of England Governor is right about the national picture – across England and Wales the average house price is now worth around six times the average salary. That’s down from the levels of 7-plus it hit before the crisis in 2008.
However, this overall figure masks an enormous range of differences throughout the country. We’ve done some analysis on this today, and the findings are quite astounding. First, a quick explanation of how we arrived at these numbers: we compared the average house price in certain regions of England & Wales (the Land Registry figures on different districts don’t extend to Scotland and Northern Ireland unfortunately) to the average salary of people living in that specific region. That final distinction is important: house prices in London are higher than elsewhere in the country, but then so are salaries. You only get a decent sense of the comparative expense of a home by comparing those who actually live in the area.
So, for instance, the median salary in Kensington & Chelsea was £41,315 at the midway point of this year. The average house price at that same point was £1. 19m. That equates to a price-earnings ratio of 28.9 times. To put this in context, the ratio in the borough has never been this high. The highest it reached before the crisis was 15 times; it has kept rising ever since. As you can see from the table below, it’s a similar story throughout London.
But although the figures are most eye-watering in London, this is not merely a phenomenon isolated to the capital. Prices in South Bucks and the Mole Valley (home to Leatherhead) are well over 11 times the average salaries locally. Prices in Ryedale in North Yorkshire are almost ten times local salaries. Throughout Britain (particularly, and perhaps predictably, in the commuter belt around London, and in towns where there are plenty of second homes) there are pockets where prices are well in excess of local salaries.
But elsewhere in England and Wales, prices are at far more affordable levels, with many regions of Wales and the North East having affordability ratios closer to three times – what would normally be regarded as a reasonably affordable level.
Now, to some extent, this disparity has always existed. House prices in certain smart parts of London have always been more expensive – even in comparison to local earnings – than in other parts of Britain. The point, however, is that the gulf has, suddenly, yawned wider to an alarming degree over the past few years. Looking at the way the house-price earnings ratio evolved over recent years in various parts of London, you’d struggle to spot the housing crash, for a simple reason: it never really happened in, prime London at least. As the markets slumped in 2008 and investors from around the world looked for alternative assets to buy (eg not bank shares), they discovered London property. Global quantitative easing, and the 25% depreciation of the pound, only made the play that much more attractive. In short, London property has become an asset class for global investors – in much the same mould as gold or bonds.
The problem is that at these kinds of levels it is becoming nigh-on impossible even for those who live within certain areas to afford the high prices of property. The upshot is that many will have to move elsewhere in order to find somewhere more affordable. Again, that’s not a new phenomenon, but the scale of the unaffordability in certain regions most certainly is.
It all raises the question, once again, of the wisdom of the particular formulation of the Chancellor’s new Help to Buy scheme. The policy will part-fund buyers’ deposits up to a purchase price of £600,000. This extremely generous ceiling implies that the scheme will be available for buyers within London, as well as outside. Quite why the Government should be subsidising a market which is already, in places, the most expensive in history (and by some yardsticks the most expensive in the world), is unclear.
You can read a news story and see a video report on this subject here.
The most expensive regions
Region House price/earnings ratio
Kensington & Chelsea – 28.9
Westminster – 19
Camden – 18.3
Hammersmith & Fulham – 17.5
Hackney – 15.1
The least expensive regions
Region House price/earnings ratio
Blaenau Gwent – 2.2
Hartlepool – 2.8
Merthyr Tydfil – 2.8
Kingston-upon-Hull – 2.9
Rhondda, Cynon, Taff – 2.9