Official figures obscure how property affordability plummeted in the pandemic

Hargreaves Lansdown comments on the publication of official figures from the ONS which obscure how property affordability plummeted in the pandemic.

Key points:

Official figures show that in 2020, homes in England cost on average 7.8 times earnings – the same as a year earlier. In Wales the figure was 5.9 – up very slightly from 5.8.
In England, median prices rose 2.9% and earnings 3.5%. In Wales, prices were up 3.1% and earnings 2.4%.
Earnings grew faster than house prices in nearly 60% of local authority districts.
New builds are less affordable – at 9.6 times earnings in England, compared to 7.6 times for existing properties. In Wales it’s 8.2 times and 5.7 times respectively.
However, the figures are designed to give us a picture of affordability in April 2020 – which is very different from the overall picture in 2020.

Sarah Coles, personal finance analyst, Hargreaves Lansdown, said:

“The official figures show that buying a home of your own didn’t get any less affordable last year, but in reality, clearly it did.

“These figures are designed to show average affordability around April, which misses the impact of the pandemic entirely. In reality, throughout the rest of the year, huge price rises helped push property prices even further out of reach.

“First the pandemic shut the market, freezing sales part of the way through, and causing demand to build up. Then it changed the way people wanted to live, as their small flats close to work started to make less sense for their new lifestyle than somewhere with a bit more space – fueling the fire.

“Finally, it persuaded the government to offer the stamp duty holiday in an effort to get the market back on track when it reopened. This effectively put buyers on the clock, squeezing more demand into a shorter period, and pushing prices up again.

“The average house price also varies enormously, depending on where in the country you want to buy, whether you want a new-build, and increasingly whether you’re buying a flat or a house. The most recent ONS figures show the prices of detached houses have boomed 8.6% in a year, while the price of flats is up just 2.6% over that time. It means those trying to sell a flat and buy a house have an even bigger mountain to climb.

“When it comes to wage rises, averages can be misleading here too. While the average wage increased significantly in 2020, this was partly because so many of the jobs that have been lost to the crisis are low wage roles. This automatically pushes up the average without people actually getting a pay rise. It means in reality, affordability may be even lower.

“And all this has come at a time when mortgages for those with smaller deposits have been even thinner on the ground. Fortunately, things have picked up from the start of 2021, with more lenders returning to the market over the past few weeks. The government’s offer to guarantee 95% mortgages will help support this end of the market still further. However, there are still restrictions on many of these mortgages. Some 95% mortgage lenders, for example, won’t lend on flats or new builds.

“Even if you can get hold of a high loan-to-value mortgage, you need to seriously consider your position first. The Office for Budget Responsibility expects unemployment to peak at 6.5% of the workforce at the end of this year – which is another 500,000 job losses. If you have any concerns over the security of your job, it might not be the best time to take on a hefty mortgage.

“There’s also the chance that the end of the stamp duty holiday and the furlough scheme will take some of the heat out of the market, so we could see prices falling. For those with very small deposits this raises the possibility of negative equity. If you have no reason to sell up before prices recover, negative equity doesn’t have to be a disaster. However, if you’re buying on the assumption that house prices will keep rising forever, it’s important to bear in mind that there are times when they won’t.”

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay