The proportion of people able to buy a typical UK house is near 2006/07 levels.
That makes a fall in house prices more likely, but not inevitable.
Whilst doom-scrolling on Twitter, you probably swiped passed some version of Chart A below. It shows that, since 2000, the median wage in the UK has doubled. Average house prices, meanwhile, have more than tripled.
The divergence is striking, but it’s been possible for price-growth to outstrip wage-growth as:
Mortgage costs have been falling. This means buyers can borrow more and pay the same monthly amount of interest. The 2007/08 financial crisis prompted the Bank of England to cut interest rates (Chart 1), though the recent inflation shock has resulted in a modest rebound in interest rates.
Deposits increased during the pandemic. Banks charge lower interest rates to those with large deposits - meaning they can afford a larger mortgage with the same salary. Deposits grew substantially in 2020, as people saved more during the COVID-19 lockdowns (Chart 2). But otherwise deposits were stable between 2014 and 2019, so there’s not much evidence of extra-help from the Bank of Mum and Dad. And in 2022 savings have returned to pre-COVID levels.
Banks are lending more for a given income. Banks are basically making riskier loans (Chart 3). Crucially, however, the Bank of England prevents the average loan-to-income ratio rising above 4.5, so this can’t carry on increasing indefinitely.
The profile of house-buyers is changing. The “average house” is now being purchased by people with well-above-average incomes (Chart 4). Specifically - the buyer of an average house today is the richest 31% of society. In 2013 they were in the richest 38%. Basically, the number of potential buyers of the “average house” is shrinking year-on-year.
With mortgage costs now rising and household savings flat-lining, any additional divergence between house price growth and wage growth will have to be driven by factors 3 and 4: riskier loans and buyer-pool shrinkage. But both will make the housing market more vulnerable to a price-crash. Riskier loans will make foreclosures more likely, increasing the supply of houses for sale. Buyer-pool-shrinkage will reduce the demand for houses. Either way, it becomes more likely that supply of houses-for-sale exceeds demand for them, which would put downward pressure on house prices. Its notable that we’re approaching 2006/2007 levels of “possible buyers”.
All that given in the medium-term we’d expect either:
Wage price growth to either match or be greater than house-price growth. In other words, that the gap between the lines in Chart A does not continue to grow.
A further increase in house prices relative to wages, followed by a house-price correction. That’s because any such increase in house prices would have to be driven by riskier loans or further shrinkage in the proportion of people able to buy loans. The former would make quick sell-offs more likely, and the latter would leave the market less able to absorb any demand for quick sell-offs.