London homes hit record low affordability

Being able to afford a home in London is now so far out of reach for the average worker in the capital that a house or flat now costs 14.5 times the typical income, a new study reveals.

The gap between earnings and house prices has nearly doubled in the past 15 years in the capital, the latest Hometrack UK Cities House Price index shows. 

However, while houses in London are still growing ever-more unaffordable, they are being outpaced by homes in Manchester and Birmingham. 

Affordability: House prices in London have reached a record 14.5 times average earnings

The average price in Manchester rose by another 6.7 per cent in the year to October to £158,800, while the average price in Birmingham increased by 6.2 per cent to £155,600.  

The UK housing market continues to show a big North-South divide as southern big cities are reaching record levels of unaffordability while some northern metropolis are actually more affordable than they were over the past decade. 

As well as London, other cities in the South such as Cambridge, Oxford and Bournemouth have also recorded double digit price to earnings ratios.

In contrast, outside of the south of England affordability has remained pretty much unchanged, with the exception of Glasgow, Liverpool and Newcastle, where the current house price to earnings ratio is actually lower than the average over the past 15 years.

It comes as prices across the UK’s biggest cities accelerated to 6.1 per cent to £254,700 in the year to October, the highest rate of growth since September last year and above the UK’s average growth rate of 4.7 per cent.

Despite the recent price rises, homes in Manchester and Birmingham remained some of the most affordable in UK cities, with earnings ratio between 5 per cent and 13 per cent higher than the 15 year average.

‘In regional cities outside of the south east house price growth remains robust as affordability is still attractive and unemployment continues to fall,’ said Richard Donnell, Research and Insight Director at Hometrack.

‘This can be seen in cities such as Manchester and Birmingham where the current house price to earnings ratio is only slightly higher than it has been on average over the last 15 years,’ he added.

‘As long as mortgage rates remain relatively low and the economy continues to improve, there is a strong feasibility that house prices will rise steadily in regional cities over the next two to three years.’

All mortgage lenders put a cap on the amount an aspiring homeowner can borrower as a multiple of their income. 

London and Cambridge have become increasingly unaffordable over the past 15 years

London and Cambridge have become increasingly unaffordable over the past 15 years

They are only permitted to offer 15 per cent of borrowers a multiple higher than 4.5 times earnings, so this tends to the the maximum level to which a household can borrow. 

Lenders tend to take into account the incomes of all of those looking to take out a mortgage. Nonetheless, even if a couple were both working full time in London on average salaries, they would still be way off the income required to buy an average home. 

Prices in London rose by another three per cent over the past year, although this was mostly being driven by commuter areas, with prices in central London actually flat or slightly falling.

Hometrack expects this will continue over the next two to three years as house prices adjust to the levels that home buyers are prepared to pay.

Prices in London and Cambridge are up 60 per cent in one decade alone. In contrast, prices in Glasgow and Liverpool are lower.

House price to earning ratio in London and Cambridge is well above the average over the past 15 years

House price to earning ratio in London and Cambridge is well above the average over the past 15 years

‘House prices are in the process of adjusting to what buyers are willing or able to pay. Tax changes for investors and low yields have already reduced investor demand in London,’ Hometrack said.

‘Mortgaged first-time buyer numbers are also down 15 per cent over the last three years. We expect Budget stamp duty changes to have limited impact in London as the greatest barrier remains the high level of income required to pass mortgage affordability stress tests,’ it added.  

Cambridge followed London, with the average home 14.3 times the average earnings in the city, while rising prices pushed the price to earnings ratio to 12.6 in Oxford, 10.1 in Bournemouth and 9.7 in Bristol.

These cities have affordability ratios that are 20 per cent to 40 per cent higher than the long run average, Hometrack said.

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