The UK government has been waxing lyrical about plans to increase the number of new households per annum to 300,000. The idea is to increase the number of new build houses, make them more affordable and reduce regional pressures on the UK housing market. However, with the average first-time buyer spending £420,000 in London and an average of £200,000 outside of the capital, will these new houses really be affordable?
Average household income
The average household income in the UK now stands at just over £26,000 with the figure for London alone said to be around £40,000. While these figures are difficult to calculate with any real accuracy because of regional variations, differences across careers and the large variation in income, they do give an indication. Wage inflation is likely to be extremely subdued for the next few years and indeed many believe that in real terms household income could reduce in spending power in the short term. However, there is a proviso in that nobody knows how Brexit will pan out, and how the UK economy will perform.
As we touched on above, the average first-time buyer in London will spend around £420,000 against an average of £200,000 outside of the capital. If we work on the average UK household income of £26,000 for those outside of London, and a 20% deposit on any house purchase, this works out at six times household income for mortgage purposes. If we do the same calculation for London the multiple is 8.4 times household income which reflects the greater expense of living in London even if household income is significantly higher.
If we work on the understanding that average UK household income figures are calculated on one working wage, with mortgage companies working on around 4.5 times income, single first-time buyers will struggle. The situation is very different with two wages coming into the home even if one is a part-time position. Assuming a part-time wage is on average 50% of a full-time wage, the average UK household income figure would rise to £39,000 outside of London and £60,000 within London. This makes a major impact on the affordability factor!
The multiple of six times for a household outside of London would fall to 4.1 times income and the figure for London would fall to just 5.6 times household income. In theory, assuming first-time buyers are able to afford the initial deposit, there is no reason to believe that even average priced newbuilds could be affordable to first-time buyers where there are two average incomes, one full-time and one part-time. For those where only one income is certain it is difficult to see how they would be able to afford an average priced new build property.
In a perfect world first-time buyers would hope for house prices to remain stagnant or fallback while wage inflation increases their spending power. We may see a weakening in UK house prices in the short to medium term but wage inflation will also remain very fragile. There is growing concern that expected low wage inflation compared to cost of living inflation could effectively reduce the spending power of households going forward. It will be interesting to see how the UK government tackles the issue of affordable housing for first-time buyers while maintaining quality and building in areas where there are employment opportunities. Not the easiest of challenges!