There’s no such thing as an ‘affordable’ home any more

Sometime this year, Halifax’s House Price Index will put the average cost of a British home at more than £300,000. It might already be there.

The latest edition of the index produced an average of £299,138, a rise of 0.7 per cent over December, which had recorded a 0.2 per cent fall.

There is more on the way. Count on it. The lender expects “modest” growth of between 0 and 3 per cent over the course of this year. This comes after a 4.8 per cent leap in 2024, which smashed expectations.

Given the level of demand, and the fact that the cost of renting is positively ruinous, I wouldn’t be at all surprised to see it coming in towards the top end of that but without repeating last year’s surge.

The latter was driven by rising incomes and better mortgage rates – helped along by a couple of interest rate cuts by the Bank of England.

This year the outlook is murkier. Wage settlements have eased – although they are still running ahead of inflation – and the economy is also not in a happy place.

At the same time as its (very welcome) latest decision to cut rates by a quarter point to 4.5 per cent, the Bank also slashed its GDP growth forecast to a dismal 0.75 per cent.

The Labour Force Survey put out by the Office for National Statistics has been the subject of an ongoing controversy over its reliability. However, we know for certain that the number of job vacancies has been falling for an extended period. Chancellor Rachel Reeves’s decision to increase employer national insurance contributions looks set to continue that trend. Many firms have responded to this tax on jobs by instituting layoffs.

Rising unemployment and a bad economy are apt to make would-be buyers nervous. But working in their favour is that interest rates look poised to fall further, even with the Bank of England warning that energy prices – yes, them again – could push inflation up to 3.7 per cent.

That is the sort of figure that will make the rate setters on the Monetary Policy Committee at the Bank of England (MPC) skittish. But if inflation then falls back to the hallowed 2 per cent target, and it is expected to eventually do that, they will move rates down again. The spectre of stagflation – low growth, high inflation and high rates – is not something they want to be presiding over if they can possibly avoid it. It’s the sort of thing economists use to frighten their errant children into behaving.

The price of fixed-rate mortgages – the most popular type – are governed not by base rates but by the longer-term expectations for rates expressed via the City’s interest rate swaps market. The fact that some forecasters think there could be as many as three more cuts this year and rates could be as low as 3.5 per cent by next spring is good news for those seeking fixed deals.

The current house price to earnings ratio – based on the mean average income of a full-time worker – sits at 6.34. This means that the average full-time employee would need to spend 6.34 times their annual salary to buy a home. That compares to the record high of 7.3 reached in the middle of 2022.

It is worth noting that while it has been above 6.0 since August 2015, in January of 2000 it was just 3.64. I doubt whether Theresa May is anyone’s idea of a great prime minister, but she was onto something when she talked about “intergenerational fairness”. It is something that deserves more attention. Even with affordability improving a little, Gen Z still face significantly higher housing costs than did Millennials who themselves faced significantly higher costs than Gen-Xers such as myself.

The sharp rise in interest rates to combat the inflationary surge that saw the Consumer Prices Index peaking at 11.1 per cent in October 2022, further hit them in the pocket, although it should be said that the UK’s rates are still quite a bit below their historic average of roughly 7 per cent.

Mortgage costs as a percentage of income, which factors in rates and house prices, have fallen over the last couple of years. The most recent Halifax review, published at the end of November, put the figure at 29 per cent, which is the lowest level for two years.

Affordability is, however, still stretched. Which limits the potential for price rises given Britain’s difficult economic situation.

But the burning desire to own one’s own home remains. As challenging as it is, buying a house is one of the best financial decisions anyone can make. That, and the fact that Britain has a housing shortage, means prices will stay high and affordability will remain stretched for the foreseeable future.