Week 45, 2012: UK Housing Affordability

Summary: Since we last covered housing affordability in the ERC Chart of the Week, affordability has continued to increase, with the House Price to Earnings Ratio now below the thirty-year average for the first time since 2002.

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 26.1% 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? As we pointed out last year, the cost of housing makes up such a large proportion of people's spending that it can have a major effect on the rest of the economy.  The Mortgage Affordability Index is at a fifteen year low, meaning that people taking out mortgages on homes today have more of their earnings left over to spend on other things.  It is also significant that the House Price to Earnings Ratio has dropped below the thirty year average for the first time in a decade.