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UK Property Becoming More Affordable at Quickest Pace In Decades

UK Property Becoming More Affordable at Quickest Pace In Decades


(Bloomberg) — House prices across Britain are on track for their longest period of improved affordability in more than two decades, paving the way for more people to access on a real estate scale.

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This trend reflects expectations of rising wages and stagnant or even falling property prices, which would give consumers greater purchasing power.

The prospects, if realized, would pose a double-edged sword for Prime Minister Rishi Sunak’s conservative government as it prepares for a general election next year. While a fall in house prices would anger traditional conservatives who are more likely to own a property, younger voters worry that high mortgage costs and purchase prices are making home ownership increasingly out of reach.

“Households should be better placed to take advantage of improved affordability, given that we expect real incomes to rise over the next year,” said Gabriella Dickens, senior UK economist at Pantheon Macroeconomics.

The forecast rounds off a year in which the average house price fell 1.8% to £257,443, according to figures released by Nationwide Building Society on December 29. This drop is much less severe than the 10% drop that economists predicted last December for this year. year. In real terms — taking into account inflation — they are down 11%.

Last year’s decline slightly dented the surge in property prices since the start of the pandemic. By Nationwide’s estimate, prices are still 20% higher than they were at the end of 2019, just before coronavirus hit the UK.

House prices held up better than expected due to a shortage of places in the market and a stabilization of borrowing costs after the Bank of England pushed its benchmark policy rate to the highest since 2008.

For the coming year, most forecasters expect only a moderate decline in house prices, of zero to 2%. A Bloomberg survey showed Oxford Economics was the most pessimistic, expecting a 4% decline. But it’s much better than last year’s forecast, which called for declines twice as fast or faster.

While property prices are expected to stagnate, salaries are soaring. Average total profits are expected to rise 7.1% between the fourth quarter of 2022 and 2023, 4% in the 12 months through the fourth quarter of 2024 and 2.5% the following year, Bloomberg Economics predicts.

The continued rise in wages until 2024, fueled by a tight labor market, will go some way to putting more money in citizens’ pockets. This is a factor that could prevent the type of collapse in house prices that the UK experienced in the early 1990s. Forecasts for the coming years now suggest the longest period in which wages will exceed real estate prices since the turn of the century.

“It seems likely that a combination of solid income growth, coupled with slightly lower house prices and mortgage rates, will gradually improve affordability over time,” said the chief economist at Nationwide, Robert Gardner. “If the economy remains sluggish and mortgage rates moderate only gradually, as we expect, house prices will likely experience a further slight decline or remain broadly stable.”

Despite this, many economists still view British homes as overvalued. There is currently a 10% gap between the price of a property in the UK and what economic fundamentals can justify, according to analysis by Niraj Shah of Bloomberg Economics.

Those numbers worry young voters, including millennials — the first generation not to become more conservative as they age, according to some studies — who are struggling to get a foot on the housing ladder.

In a sign of the extent to which the Conservatives are trying to appeal to young people, Housing Minister Michael Gove told The Times in a recent interview that the government was considering a number of housing measures for its programme. These could include a scheme to support longer-term mortgages, reducing the amount of deposit needed, and a relaunch of the Help to Buy scheme.

The housing affordability outlook is consistent with other indicators showing a slowing of the cost-of-living crisis that has wiped out household purchasing power since the pandemic. The sharpest rise in inflation in three decades has outpaced wage growth for much of the past two years. The situation has now started to reverse.

Yet there is no indication that nominal house prices will fall sharply. With unemployment barely above a record high and wages rising, there aren’t a growing number of people giving up properties they can no longer afford.

“Forced sales have been contained compared to past recessions, given historically low unemployment and mortgage regulations that encourage banks to repossess only as a last resort,” Shah said. “At the same time, healthier balance sheets and high numbers of fixed-rate mortgages insulate households and give them time to adjust. »

His expectations for a favorable year are shared by several other real estate market experts.

“The rapid pace of growth in average wages, alongside stagnation or decline in property prices, has led to a significant decline in the ratio of property prices to average incomes, thereby improving affordability financial in this regard,” said Martin Beck, chief economist at The New York Times forecasting group. ARTICLE EY Club.

Of course, for anyone buying with a mortgage, affordability will also depend on prevailing interest rates and credit availability. Mortgage rates have climbed since the Bank of England began raising its base rate in December 2021, and around 1.6 million people will feel this pain when their mortgage contracts end in 2024 and are forced to refinance, according to the professional body for the banking sector UK Finance. .

Mortgage rates are still three times higher than in the aftermath of the pandemic in 2021, Gardner said. “As a result, housing affordability has remained tight. A borrower earning the average UK income and purchasing a typical first-time buyer property with a 20% deposit would have a monthly mortgage payment equivalent to 38% of take-home pay – well above the long-term average of 30%. %.

But Beck said the sharper-than-expected fall in inflation in recent months could lead the Bank of England to cut its key rate more quickly than policymakers are currently suggesting. Markets are already anticipating a reduction of 1.5 percentage points during 2024.

Andrew Wishart of Capital Economics estimates that the peak-to-trough decline in house prices will extend from around 4% currently to 6%.

“We believe mortgage rates will hover around 5% through mid-2024, which, combined with the economy entering a recession and a slight increase in unemployment, could lead to modest further price declines real estate,” Wishart said.

But given the resilience shown by the real estate market this year, he did not rule out the possibility that prices could also hold up better than expected in 2024.

All this means first-time buyers should be in a better position to get a foot on the property ladder, according to house search portal Zoopla. He estimates that 40% of people moving over the next two years will be first-time buyers.

“Rapid rental growth continues to drive this group: average rents have increased faster than average mortgage payments over the past three years,” Zoopla said in a report.

–With the help of Harumi Ichikura.

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