What can we say about house prices in the UK? A resounding answer from those going through the house hunting process might be, ‘They’re too high!’ But… too high compared to what? Even if you went back to the 1970s, when properties seemed more affordable, the context is important. Then, we were dealing with sky high interest rates, recession, high levels of joblessness and a restricted mortgage market. So… even if the prices were lower than they are today, it doesn’t necessarily mean they were more affordable necessarily.
In any case, it can be informative to look at historic house prices to understand more fully what is happening now. We will do just that.
This chart is based on Nationwide data. As you can see, historic house prices do not follow a smooth line. For example, in 1975, the average price (adjusted for inflation) was £104,242. It dropped for a few years, climbed a bit and then we saw a bigger spike in 1988 at an average of £175,572. Again, prices dropped until they began quite a dramatic ascent, reaching a peak of £295,548 in 2007.
Following house prices is like taking an expensive rollercoaster ride!
The Last 10 Years
Let’s look at the last ten years specifically. Currently, the average cost of a new home in the UK is £294,845. Congratulations: we have the dubious distinction of having hit an all-time record high. But further, home prices have been on the rise at a rate of 11% per year.
This is happening in the shadow of a pandemic as well as in a time of climbing inflation and increasing interest rates… which is leading to far more costly borrowing when it comes to mortgages.
It is also important to remember that we’re not talking a strict apples to apples comparison in terms of price. For example, according to Nationwide, the average house cost £251,133 at the close of 2021. Ten years prior to that (2011), the average cost was £164,785. But this figure is not adjusted for inflation. When we adjust for this factor, the average 2011 house price is equivalent to £196,776. So adjusted for inflation, home prices grew by 2.5% a year between 2011 and 2021.
To dig into more historic house prices for more complete context, by the end of 1991, people were paying an average of £53,635 for a home. In 2021 money, that’s £99,618. Without adjusting for inflation, that shows a growth rate of 5.3% a year over 30 years – for an overall 368% increase. But when we account for inflation, the annual growth rate was significantly lower at 3%, or 152% total.
At first glance, 152% versus 368% is certainly a lot more palatable – though hardly comfortable for average homeowners. But again… it’s all about context. Even the ‘smaller’ 152% increase over 30 years has been far more accelerated than the growth of wages.
Wages Have Not Kept Pace
Let’s say you earn an annual salary of £100,000. You purchase a house for £300,000, putting 10% down for a deposit. You secure a 25 year 3.5% repayment mortgage with a monthly payment of £1365. Since you take home about £5500 after tax, you have plenty left over for groceries, utilities, repairs and take aways.
So why are people complaining about high prices? Because the average full time worker in the UK does not make £100,000. They don’t even make half that. And they don’t even make a third of that. The average salary is £31,285.
If your take home per month is about £2000, a £1365 mortgage payment is just about out of reach. But if your take home per year is about £3185, chances are you could not have saved up a 10% deposit, nor secured such favourable mortgage terms.
This is why people talk about a housing crisis. This is why it is much more difficult for young UK residents today to buy a house than it was for their parents and grandparents.
Historic house prices give us a great glimpse into the past and present, but they also highlight related issues, such as stagnant wage growth. While we have seen some slow, low progress in terms of pay, one thing remains certain: house prices will continue their ascent.