Property prices in 2020 would need to fall by 37% on average to make home ownership affordable for a … [+]
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Buying a home has historically been one the defining traditions among British residents, but over recent decades the affordability gap for buyers across the country has on average continued to stretch, and the inequalities that could deepen as a result of the coronavirus pandemic may lead to greater financial hurdles for many, at least over the coming years.
Where this issue truly came to the fore recently was with the release of the Open Property Group’s latest house price Affordability Index. The index compares house price and salary data for cities and widens what is already a longstanding belief that house prices are by and large unaffordable.
Perhaps the most poignant takeaway of the index is that property prices in 2020 would need to fall by 37% on average to make home ownership affordable for a single person on an average income.
The breakdown looking at the top 10 most affordable and least affordable cities in the U.K. is also a cause for concern…
Topping the least affordable end of the scale you have got Oxford, where house prices must drop by 70% to be affordable, followed with the City of Westminster at 69% and Cambridge in third requiring a 67% decline in prices to be considered affordable.
Looking at the most affordable cities, Hull would need house prices to drop only 12% and Stoke-on-Trent requires a mere 4% decline. At the very top of the affordability list however is Durham, which inversely is +16% more affordable than actual house prices. That makes Durham the only U.K. city in the index where actual house prices are below the range of affordability.
The race is on between income and economy
Despite the ongoing COVID crisis, house prices are expected to increase over the coming years. Back in November last year, before the pandemic hit, Savills released their five-year forecast for U.K. house price growth, positing that the average price of a home would increase by 15% over the next five years up to 2024. This forecast already factored in the possible economic impacts of Brexit, itself on a ticking clock as the December 31, 2020 transition period to negotiate arrangements on trade, travel and business draws close.
With the pandemic ongoing, Savills maintained their five-year forecast in April, but in May cautioned that the forecast was predicated on the projection that bank base interest rates would rise to 2%; instead the projections from Oxford Economics predict a rise in interest rates to only 1% by the end of the period under both baseline and downside scenarios.
But what does this mean for house prices? Well in the short-term at least, lower interest rates will mean lower mortgage borrowing costs, which means that buying a home should become somewhat easier as affordability pressures are relaxed. But consequently, the lower base rate has also directly encouraged banks to slash their savings rates to near-record lows. This makes it more difficult for potential buyers to save up for a home.
Saving for a home is usually a long-term decision, and if it takes longer for prospective buyers to save, there is a risk that house prices will outstrip earnings. But an additional factor that is likely to be particularly exacerbated due to the coronavirus is downward pressure on wage growth in the months to come.
Prior to COVID really taking hold, from January to March 2020, average income growth in the U.K. was estimated at 2.4% in terms of total pay, with real pay growth put at 0.7% according to the Office For National Statistics (ONS).
In real terms this is still above inflation, but that growth has been steadily declining over the first three months and the next quarter of results will be an interesting barometer of continuing growth and policy direction. We still have historic-low interest rates set at 0.1% which will likely encourage more borrowing from individuals and businesses, particularly with the financial strain caused by the lockdown. Low interest rates and increased borrowing have the knock-on effect of pushing up inflation which in turn could encourage further house price growth.
The ONS UK House Price Index, released around the same time as their wage growth data, also showed that average house prices increased 2.1% year on year in March 2020, up from 2% in February. Whilst the index was thereafter suspended due to the pandemic, it shows that total pay growth was just barely outstripping house price growth.
It also doesn’t help that the general cost of living outstripped house prices over the last decade, adding to the burdens felt by savers. And with a post-Brexit trade deal still unresolved – tick tock on the December 31, 2020 transition period – there is a risk that imports of foods and goods will increase in price.
The furlough scheme is thankfully available to support workers and continue providing them with an income to cover household costs, but with the cap at £2,500 for monthly wages, with exception to those employers topping up, savings are likely to decline for the approximately 8.9 million employees currently on the scheme as of June 7. This also applies to those on the government’s self-employment support scheme. With the country potentially facing a difficult recession, there is a hanging threat that unemployment will increase, or that workers will be asked to take pay cuts as a result of a reduction in business; the loss or reduction of income equally applies to self-employed workers. Indeed, recent polling from the StepChange Debt Charity found that around 28% of adults, roughly 14 million people, had experienced a drop in income since the lockdown started. Of those affected, approximately 4.6 million people accumulated £6.1 billion of arrears and debt as of late May.
With millions facing financial difficulty reduced savings, and negative career prospects, the likelihood of them affording a house in the near future is becoming progressively slim. House prices may fall in the short term, but not likely by a considerable margin. As I mentioned in my previous Forbes piece, data that we’ve been collecting at Reapit show that housing market activity has been on the increase since restrictions were lifted on May 13. In the long-term, house price growth will likely continue, so how can affordability catch up?
Solutions for growth and change in the marketplace
Changes in house prices always come down to supply and demand – meet the supply and prices come down, too much demand and prices go up. In this case average property prices have become increasing more unaffordable for potential buyers because of high demand and limits to supply, particularly in popular cities like London and Oxford.
Key to correcting this would be for housebuilding to increase. I’ve frequently advocated for an ambitious, large-scale construction plan to build affordable homes for millions across the U.K. This could entail an extension of the Help-To-Buy scheme to support first-time buyers purchase new-build homes, and I would go further to suggest extending it to existing properties in the second-hand market to allow them to benefit from support as well – which was one of the housing policies I was hoping the incoming government would implement during last year’s general election. Further changes might involve opening up some of the greenbelt to new development; contrary to popular belief, the U.K. is not widely built on, and the true estimate of open land is in range of 88% to 99.9%, leaning generally towards the latter figure. It would also mean supporting the construction industry, which has faced an increasing number of insolvencies among small and medium-sized builders in recent years – just last year 368 firms filed for insolvency. Perhaps a series of loans or grants tied to affordable construction targets would support the development of new homes and protect construction companies from collapse.
Another factor in play already is a change in lifestyle. Even before the pandemic hit, increasingly more people were choosing to rent over buy. Whilst it cannot be understated that affordability is a key factor, this growing trend is a social one as much as it is economic. And for many, renting is a much easier alternative that provides a facility to save, even if rents are also growing – averaging up 2.7% year on year in May. Over a longer period, as more people choose to rent over buy, this could lead to a reduction in demand for homes to purchases, taking the strain off supply and resulting in a reduction to prices, making them more affordable for everyone, from first-time buyers to people selling up or downsizing.
This lifestyle shift may also be felt in where people choose to live. The lockdown has encouraged workers to revaluate what they want from their living circumstances, with many working from home, the value of a garden or proximity to green space is in higher demand, and Rightmove found last month that out-of-city enquiries were higher than previously registered. There definitely could be a permanent change to buyer priorities after COVID with a desire for a less centralised city lifestyle and commute facilitated with work from home tech making it possible. This could mean an adjustment to where people choose to move, with traditionally commuter links no longer required for many workers at home. If an increasing number of people choose to move to more affordable areas, or indeed cities, outside of their commuter zones, it could bring down prices in the less affordable areas, somewhat rebalancing the housing market.
Any plan requires ambition
Ultimately what brings affordability levels in line are higher wages and lower prices. For that, a stalwart and growing economy is required to improve savings and give more people the opportunity to buy a home. We have many challenges ahead of us, not the least emerging from this lockdown with massively increased public debt, a recession in the midst and Brexit on the horizon. It will take significant political will and further expenditure to assuage public confidence and get them to spend, whilst robust trade deals with the EU and other global parties will be required to keep costs of many household goods from spiralling.
The support structures of the government are likely to stave off a mass sell-up forcing down house prices, but the government must go further to protect and grow the housing market. That means encouraging more residential construction, and perhaps even opening up some of the greenbelt for development. Financial support vehicles such as Help to Buy need to be extended, and maybe even broadened to the resell market, not just first-time buyers. And all of this must be accompanied with fiscal stimulation to support economic and income growth to balance to improve personal finances. Only then will housing affordability begin to be addressed.