The link between house price growth and earnings across the country, and the extent to which it has been broken in London, has been highlighted by new analysis from real estate adviser, Savills.
Regions such as the North West, Yorkshire and the Humber, and Wales show a very strong link between earnings and house prices, the company says, based on analysis of new data from the ONS.
Across the UK as a whole the average house price to earnings ratio stands at 10.7, compared to 18.0 in London.
“The performance of housing markets in the north of England and Wales is linked to what people can afford to borrow based on their incomes,” says Lawrence Bowles, senior research analyst at Savills. “House prices remain relatively affordable to aspiring local buyers, so as earnings continue to grow, we expect to see continued house price inflation.”
At the other end of the spectrum, house price inflation and earnings growth in London are almost entirely dislocated. In 2015 house prices rose 11% while earnings rose just 1%; conversely earnings rose 7% in the two years to September 2019 while house prices fell by -2%.
“Our analysis shows that housing affordability in London is far more stretched than in any other region, leading to extremely high deposit requirements and higher loan to income borrowing,” reports Bowles. “Any further house price inflation across the mainstream market will rely on that affordability pressure easing as earnings rise.”
The differences in the relationship between house prices and incomes across the country underpins the shape of Savills five-year house price forecasts.
The regions where affordability is least stretched are expected to see the strongest growth – from 18.2% in Wales up to 24.0% in the North West. By contrast, average values are expected to rise by just 4.0% in London over the period as affordability – particularly the deposit hurdle which now stands at an average of £145,000 for first time buyers - limits the capacity for further growth. As London’s affordability pressures ease over the period, more people will be able to access the housing market and so transactional activity will increase.
Much stronger growth is forecast for London’s prime markets, which are much more reliant on flows of equity, so are influenced less by movements in earnings. Prime Central London values are expected to rise by 20.5% and across other prime London locations by an average of 11.5%.
Across the UK as a whole, Savills predicts house prices will rise an average of 15.3% over the next five years, just shy of Oxford Economics’ +15.6% prediction for earnings growth.