Property more affordable but mortgage rates push up buying costs

Property more affordable but mortgage rates push up buying costs
Housing affordability has improved thanks to falling property prices and strong wage growth, although rising interest rates are making it expensive to buy, according to new research by Halifax.

The average house price in June 2022 stood at £293,586, whilst the average annual earnings of a full-time worker were £40,196, giving a house price to income ratio of 7.3, the least affordable level ever recorded.

However, a year on, the average house price in June 2023 fell to £286,276, with annual earnings up to £43,090, lowering the house price to income ratio to 6.7.

Despite this improvement, overall affordability has been offset by rising mortgage rates, with a series of increases since December 2021. According to the Halifax analysis, typical monthly mortgage costs have gone up by 22% over the past year, from £1,020 to £1,249. This assumes average interest rates of 2.9% and 5% respectively, for a five-year fixed rate mortgage with a 25-year term and a 25% deposit. This means that mortgage costs as a percentage of income have risen from 30% to 35% over the past year.

Kim Kinnaird, Mortgages Director, Halifax, said: “The sharp rise seen in interest rates over the last year has meant the sums now look very different for both homebuyers and those looking to remortgage. Typical monthly mortgage payments are up by around a fifth, which is a big jump at any time, but particularly during a wider cost of living squeeze.

“We should remember the preceding 15 years have been characterised by historically low interest rates. Mortgage costs as a proportion of income are now comparable to those seen in 2007, despite the significant rise in house prices seen over the last decade and a half.

“Of course much has changed in the housing market and wider economy since then. Banks carry out much tougher affordability checks to make sure borrowers can manage repayments when rates go up, and the average loan-to-value is considerably lower.”

North East most affordable region to buy

The North East of England is the most affordable region in the UK in which to buy a home, the Halifax research showed, with a house price to income ratio of 4.9 and an average house price of £168,240. Only the North East of England and Scotland have a ratio lower than 5.0.

In contrast, London is by far the most expensive region in the UK to buy a home, with a house price to income ratio of 9.3, slightly lower than the 10.0 a year ago. The average property price in the capital is £533,057, with mortgage costs accounting for nearly half (49%) of earnings, up from 42% last year.

Looking at local authority areas, Inverclyde in Scotland is the most affordable area overall, with a house price to income ratio of 2.9, the only local authority area with a ratio lower than 3.0. Westminster in Greater London is the least affordable local area in the year, with a house price to income ratio of 16.0.
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