Week 30, 2014: UK Housing Affordability

Summary: This year, our annual chart on housing affordability shows quite a dramatic increase in the house price to earnings ratio, and unlike last year, mortgage affordability has also declined.

What does the chart show? The 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 average annual earnings, both for the whole of the UK. The dotted blue line represents the average over the period. The red line, measured against the right hand axis, is the 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 28.4% of average disposable income. As above, the dotted red line is the average for the period. In both cases, a lower number represents more affordable housing.

Why is the chart interesting? Back in 2012, it initially appeared that the house price to earnings ratio had fallen below the 30 year average for the first time in a decade; subsequent revisions show that this wasn't the case, and with prices growing and earnings stagnating, housing is becoming less affordable again. We've been in a rare situation since 2009, where the price to earnings ratio has been worse than the average, but mortgage affordability has been better than the average; usually they move together. This has been fuelled by record low interest rates, but as the Bank of England begins to raise rates over the next couple of years, the red line is likely to shoot back up, leaving many people in difficult financial situations.