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The impact of Household Incomes on House Prices

The media is full of stories of soaring house prices and competition between buyers for properties.  We read that it's a "seller's market". There is no doubt that house prices have increased markedly. UK house prices have increased an average of 10 - 12% in the past year alone.  And demand for house moves is showing no signs of weakening. We're setting this not only in the sales market but also in the rental market.

However the same cannot be said about household incomes. Up until 2000, the ratio between house prices and average salaries was 4.5. So the average house was priced at 4.5 times the average salary.
Nowadays the average house price is 9 times the average salary and in London it is 13 times the average salary.
Thats' a massive jump in anyone's book. And we're not alone. According to a BBC article, since 2015, property prices have increased faster than incomes in most major economies, including Canada, Germany and the UK. The disconnect has worsened since the pandemic hit in 2020, when policymakers around the world slashed interest rates to stabilise the economy, unleashing unusually low borrowing costs.

Analysts say the increasing house prices reflect severe supply shortages, rather than a bubble fuelled by risky lending like the one that precipitated the financial crisis of 2008.

Is there a disconnect between house price inflation and household incomes?

We're in a time where housing prices are rising and losing their connection with household incomes.

  • There are a number of factors at play that are putting a squeeze on household incomes. 
  • We are experiencing the highest inflation rate, forecast to reach 8% that we have seen in 30 years.
  • Energy costs are rocketing, tripling some people's bills.
  • The Bank of England base interest rate which underpins the cost of borrowing and mortgages has increased from a record low of 0.1% to 0.75% making borrowing more expensive.
  • And of course not forgetting the negative economic impact of the war in Ukraine on world economies, including ours. We are seeing food, oil and gas prices increase and likely to increase further as supplies of our basic goods  are disrupted by the ongoing war.

Yet still the demand for housing continues and prices are forecast to continue to rise.

Zoopla say demand for family houses is currently twice as high as is usual for this time of year.
Buyer activity is also being driven by the bounce back in demand for city and town centres that's been growing since the beginning of 2022.

It appears that there are buyers with savings as a result of the pandemic and lockdowns - money not spent on expensive ticket items like holidays for example. We are still seeing the results of pent up demand for house moves which built up during the pandemic and even prior in the pre Brexit period.
It seems that while interest rates remain relatively low, home owners remain confident about the housing market, the value of their home and their own financial security. These factors seem to have played their part in breaking the connection between household incomes and house prices.

One long shadow now being cast over this scenario is the threat of spiralling inflation and a consequent hike in interest rates.

Will this precipitate a downturn or will the ongoing lack of supply within the market coupled with the factors mentioned above keep sales activity strong?
Despite gloomy economic clouds gathering elsewhere, will people's desire for either their first home or a larger one, overcome these
difficulties?
What's your opinion? I'd love to hear your thoughts! Message me at gillian@househandlers.co.uk.