Week 36, 2011: Housing Affordability

Summary: House price affordability continues to fall, but is still above the thirty-year average. Mortgages, on the other hand, are more affordable now than at almost any other time in the past.

What does the chart show? The solid blue line, measured against the left hand axis, is the House Price to Earnings Ratio. This is calculated by dividing the standardised average house price with the average earnings each quarter. The thin dotted blue line represents the average over the whole period. The solid red line, measured against the right hand axis, is the Mortgage to Earnings Ratio, or Mortgage Affordability Index. This measures the percentage of the average disposable income that a mortgage on a home costing the average amount would represent; for example, a mortgage taken out today on the "average house" would represent 27.8% of average disposable income. As above, the thin dotted red line is the average for the period.

In both cases, a lower number represents more affordable housing.

Why is the chart interesting? The cost of housing, and specifically mortgages, makes up such a large proportion of most people's spending that it can have quite a large effect on the economy as a whole. Essentially, the fact that the Mortgage to Earnings Ratio is continuing to drop should mean that people have more disposable income to spend on other things; a promising outlook for the rest of the economy.