House price growth has exceeded earnings growth over the past year, and the ratio of house prices to average earnings has increased to a record high, Nationwide says.
The findings come on the back of a red hot year for the housing market, which shows little sign of abating. Nationwide and Halifax both reported in their house price indexes this month that average prices are now above £250,000.
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A 20% deposit is now equivalent to 110% of average income - a record high and up from 102% one year ago. This is proving a particularly changing disparity for first-time buyers, Nationwide says. It could also impact those looking to buy before renovating a house.
London continues to have the highest house price to earnings ratio at 9.0, although this is still below its record high of 10.2 in 2016.
Andrew Harvey, senior economist at Nationwide, said: “House prices have continued to rise more quickly than earnings in recent quarters, which means affordability is becoming more stretched.
"Due to the historically low level of interest rates, the comparative cost of servicing a typical mortgage is still well below the levels recorded in the run up to the financial crisis. However, even on this measure, affordability is becoming more challenging."
When Will House Prices Drop?
House prices have soared this year, reaching record highs in multiple house price indexes (HPIs).
House prices rose for a fourth month in a row in October and climbed above an average of £270,000, Halifax says, while the monthly rise in house prices for September was the highest in 14 years.
Meanwhile, Nationwide says that prices are now 13% higher than before the pandemic, and the Office for Budget Responsibility recently predicted that house prices will rise by 13% over the next five years following a bumper 2021.
Why have house prices continued to surge? Reasons include the stamp duty holiday extension and the new mortgage guarantee, two measures announced in the Spring Budget which kept housing market activity buoyant. The 'race for space' - with buyers seeking larger homes - has also been a factor.
But many expected the market to cool once the stamp duty holiday ended in June (prior to the tapering effect between July-September), and this was evidenced initially by annual house price growth falling to 10% in Nationwide's September house price index (from 11% in August).
However, the housing bubble is not yet ready to burst, and Zoopla forecasts a +3% increase in UK house prices over the course of 2022.
The impact of rising inflation and a widely expected rise in interest rates, though, could yet prove influential. “The Bank of England is expected to react to building inflation risks by raising rates as soon as next month, with further such rises predicted over the next 12 months," says Russel Galley, managing director at Halifax.
Galley added, however, that he does expect house-buying demand to cool in the months ahead as borrowing costs increase.
Moreover, the furlough scheme closed in October with nearly one million workers expected to have been be on the scheme, according to estimates by the Office for National Statistics (ONS). Some believe this could have an adverse economic impact which could impact house prices.
The Legacy of the Stamp Duty Holiday
The stamp duty holiday exempted tax on the first £500,000 of the purchase price between July 2020 and June 2021, and has had a remarkable impact on house prices.
Zoopla said in its July house price index that it expected prices to edge upwards by 6% in the coming months because of the clamour to make the most the tax break, before eventually easing back to 4-5%.
Moreover, the stamp duty holiday led to a shortage in supply of properties on the market, with the total stock of homes available to buy running 24% below average levels last year, according to Zoopla.
A tapering effect began on 1 July which kept exemption at double its standard level (£250,000) until the end of September. This dropped back to £125,000 at the beginning of October.
Russell Galley said in August that "much of the impact from the stamp duty holiday has now left the market", but Jonathan Hopper, CEO of Garrington Property Finders, commented on Halifax's November HPI: “So much for the end of the stamp duty holiday taking the steam out of the market. It’s a month since the tax incentive for buyers was finally withdrawn in England, but you’d scarcely know it. The market is ploughing on regardless."
Our Requirements Have Changed
The pandemic has also been a key driver of house prices, and spending more time indoors has changed the requirements of those looking to buy a home.
Two- and three-bedroom semi-detached houses were snapped up the quickest this year, Rightmove says, with many families searching for more spacious homes, following the shift to working from home.
Nick Barnes, head of research at estate agency chain Chestertons, said in September: “We expect activity to pick up as there is still substantial unsatisfied demand for spacious homes, mortgage offerings remain attractive and buyers are keen to get their lives back on track post-lockdown.”
The 'race for space' continues to drive demand, and Galley says that the demand for more space amid greater home working has been a prominent driver of buyer demand over the past two months.
A Nationwide study from earlier this year revealed that of those moving or considering a move, around a third (33%) are looking to move to a different area, while nearly 30% are doing so to access a garden or outdoor space more easily.
Greater Demand for Rural Locations
The pandemic has also increased our desire for rural living, according to a Royal London survey earlier this year, with many in major cities packing up their bags for the country.
When home movers were asked which areas they wanted to move to, 57% of Belfast movers said they wanted to move into a rural area, followed by 53% in Cardiff, 46% in London, 45% in Manchester and 42% in Liverpool.
“Unsurprisingly, space is the most desirable feature for home movers who want more room both indoors and outdoors," said Mona Patel, consumer spokesperson at Royal London.
"While cities have always been popular home buying locations, the pandemic has seen a shift in attitude as our research shows that there is a greater demand for rural locations.”
Anthony Codling, an independent housing analyst, adds: “Large numbers continue to look for more space to facilitate working from home and countless others are looking for additional homes to accommodate the emerging hybrid working from home model of two to three days in the urban office and two to three days in the rural or coastal idyll.
"Meanwhile, the number of homes for sale is not meeting demand and the outlook for prices is up not down.”
Jack is News Editor for Homebuilding & Renovating, and strives to break the most relevant and beneficial stories for self builders, extenders and renovators, including the latest news on the construction materials shortage and planning reforms. Having bought his first home in 2013, he and his wife have renovated almost every room and recently finished a garden renovation.
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