Data released by the Office for National Statistics (ONS) has cast a very interesting light on the UK property market and in particular the affordability factor. While we are currently in an alien economic environment where interest rates are at historic lows there are concerns about potential mortgage defaults as and when interest rates do rise. So, what do the housing affordability figures look like and what does the government need to do?
If we look back to just prior to the 2008 US mortgage crisis, official data shows that the average cost of a property was 7.2 times earnings. The next few years were obviously extremely volatile and depressed but the affordability factor has started to move higher. During 2015 the figure increased to 7.4 times earnings and for 2016 hit 7.6 times earnings. The problem is that house prices continue to rise despite Brexit concerns and currently wage inflation is not keeping up with this. As a consequence, the affordability factor is been stretched and is likely to continue in this direction for some time to come.
Low interest rates
As we touched on above, historically low interest rates in the UK have led to historically low mortgage rates which have to a certain extent supported the UK property market of late. Despite new regulations to reduce the number of “risky mortgages” there is growing competition within the mortgage industry to attract new customers. As a consequence, there are growing concerns that some first-time buyers who took advantage of low mortgage rates may struggle to cover their payments as and when UK interest rates eventually move higher.
What can the government do?
While much of the focus at the moment is on the UK government and Brexit talks, there is a growing need to address the UK housing problem. To be fair, while the current UK government has talked the talk but failed to walk the walk so far, this is no different from previous governments. Many will promise the earth only to backtrack on some of their promises when they obtain office. The housing market is one area which has suffered from broken promises and slow movement from the authorities.
Even though some experts applauded the UK government when it introduced the Help to Buy scheme, in many ways this has simply been fuelling demand. In effect, offering financial assistance to those struggling to climb aboard the property ladder simply fuels demand for property and pushes prices higher in the longer term. If these individuals are not able to afford their chosen properties without financial assistance, at some point this financial assistance will run out and where would this leave them?
More affordable housing
Time and time again the government has promised new affordable housing in the UK. At a time when the new build figures are running literally hundreds of thousands of units behind the curve there is much work to be done. There was always been a suspicion that politicians are reluctant to flood the market with new properties for fear of holding back price growth in existing properties. At the end of the day, would they really use the property market to curry favour with voters?