The Affordability Crisis

By March 9, 2023Financial Planning
Graphic of a For Sale sign with writing alongside reading 'Can you afford it?' representing the affordability crisis

We have commented on the prospects for house prices on a number of occasions over the last year, and highlighted the immediate headwinds that are likely to face the housing market. Recent data published by Nationwide has supported this view, as their House Price Index has now fallen by 3.2% from the peak in August 2022 to January 2023, and further weakness is likely over coming months. A recent report commissioned by Schroders on housing affordability has underlined how stretched current property valuations are and suggests that house prices could correct further in the near term.


High earnings multiples

The Schroders report analysed the average UK house price as a multiple of average UK earnings, and at nine times earnings, the last time UK house prices were this expensive relative to earnings was over 150 years ago. Apart from a blip during the 2008-9 Great Financial Crisis, the last 20 years has seen home ownership becoming steadily less affordable.

There are a number of reasons why affordability has been steadily falling. For many years, demand for housing has outstripped supply, and according to data from the Office for National Statistics (ONS) the UK population increased by 3.4m between 2011 and 2021, but only 1.9m new dwellings were built.

Wages have also lagged behind the pace of house price increases. Between 2012 and 2022, prices across the UK registered an average increase of 5.3% per annum (according to Rightmove), compared to average wages, which increased by an average of 2.7% per annum over the same period (Source ONS). More recently, however, wage inflation has picked up, with average earnings increasing by 6.4% over the three months to November 2022, compared to the same period in 2021.


Mortgage pressures starting to ease

Borrowers have become conditioned to low interest rates since 2008, and as a result, covering mortgage interest payments has not been a major concern for many holding a mortgage. Over the last 15 months, the UK Base Rate has increased sharply, increasing from 0.15% to 4%, which means that those borrowers on a variable or tracker rate will have experienced a series of hikes in their payments.

Fixed mortgage rates also increased during the first half of 2022, but the very sharp acceleration in fixed mortgage rates last October has added to the pressures on the housing market. As a result of the ill-fated mini budget, announced by former Chancellor Kwasi Kwarteng just six months ago, Gilt yields increased rapidly, which in turn pushed up the cost of securing long-term debt for mortgage lenders. As is often the case, however, the market reaction has turned out to be an over-reaction; at one point, the market rate was implying that the Bank of England Base Rate would hit 6% by the middle of this year. This is looking increasingly unlikely, and indeed, the Bank of England may actually be close to reaching the end of the rate hiking cycle, with Base Rates sitting at 4%.

Given the downward adjustment in base rate expectations, it is possible that the effect on the housing market will be lower. There are, however, a large number of mortgage holders, whose fixed rate mortgage deal is coming to an end during 2023. These individuals are highly likely to see a jump in their mortgage payments, although as fixed rates have fallen back from their peak, the effect is now likely to be less than was feared only 3 months ago.


Deposit concerns

For many first-time buyers, gathering a deposit still remains the biggest hurdle to home ownership. We have previously covered how the “Bank of Mum and Dad” is the UK’s 10th largest lender measured by total loans issued, and our previous article highlighted some of the potential issues that can arise by gifting funds for a deposit.

With house price affordability so stretched, parents and grandparents may well be tempted to provide larger gifts to help family onto the housing ladder. However, parents and grandparents need to consider their own financial position carefully before making a gifted deposit.  For example, giving away capital sums when retired, or close to retirement, can not only diminish the amount of savings or investments held, but also reduce the level of income that could be generated by any capital that is gifted. In addition, this could mean that funds are also no longer available to cover any unexpected expenditure that faces the parent or grandparent, and children will often not be in a financial position to return the favour if the parents require funds.


Solving the affordability conundrum

House price affordability can only improve by an increase in house construction (thereby easing the supply issues) an increase in earnings, or a fall in prices. In reality, it may well be a combination of all three factors that eventually improve house price affordability. However, we feel this may take many years to correct, and in the meantime, house price affordability is likely to remain stretched.

For anyone looking to gift a deposit to help ease the affordability conundrum, we can provide advice on the implications of gifting capital. We also highly recommend parents and grandparents seek independent legal advice before taking any action to help a family member with a deposit.

If you would like to discuss the above in more detail, please speak to one of our Financial Planners here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.