London house prices now 14.5 times higher than average earnings

The latest Hometrack UK Cities House Price Index reveals that the property-price-to-earnings ratio in the capital is now 14.5 times average earnings. The average property in London is now £496,000, while the average salary is £34,200. This means that the gap between earnings and house prices has almost doubled over the past 15 years – it now stands at 42 per cent.

Other cities in the South that also recorded double-digit price-to-earnings ratios are Cambridge (14.3), Oxford (12.6), Bournemouth (10.1) and Bristol (9.7).

Meanwhile, Hometrack found that three cities – Glasgow, Liverpool and Newcastle – have seen the gap between house prices and average earnings narrow over the past 15 years. In Glasgow, the price to earnings ratio is just 4.1 – the lowest out of the 20 cities that Hometrack reviewed.

The overall rate of city house price growth went up to 6.1 per cent in October 2017 – the highest rate of growth since September 2016 and a big hike from the 2.8 per cent seen in May 2017.

Affordability pressures

Hometrack suggests that London is set to underperform over the next two to three years, as sellers adjust their property prices to reflect what buyers are prepared to pay.

It reports a 15 per cent drop in the number of mortgaged first-time buyers over the past three years, suggesting that the tax break on stamp duty for first-time buyers will have little impact as first-time buyers will still have to pass mortgage affordability stress tests.

Richard Donnell, research and insight director at Hometrack, says: ’Unaffordability in London has reached a record high despite a material slowdown in the rate of house price growth over the past year. Lower housing turnover in the capital has led to a tightening of supply in recent months, which has stabilised house price growth. Even so, the gap between average earnings and house prices in the capital has never been wider.’

Regional variations

Researchers found that properties in Manchester and Birmingham were still fairly affordable, with earnings ratio between 5 per cent and 13 per cent higher than they have been over the past 15 years.

‘In regional cities outside the South East, house price growth remains robust as affordability is still attractive and unemployment continues to fall,’ Mr Donnell adds.

‘This can be seen in cities such as Manchester and Birmingham where the current house price to earnings ratio is only slightly higher than it has been on average over the last 15 years. As long as mortgage rates remain relatively low and the economy continues to improve, there is a strong feasibility that house prices will rise steadily in regional cities over the next two to three years.’ 

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