Top lender reveals how rate hikes have hurt housing market

High interest rates are worsening the affordability issues at play in the housing market, the Halifax admits.

It says that downward pressure on property prices following last summer’s peak, combined with strong wage growth, have seen the UK’s house price to income ratio fall back from a record high.

At its peak in June 2022, the cost of a typical UK home was £293,586, while the average annual earnings of a full-time worker were £40,196. This put the house price to income ratio at 7.3, the highest (or least affordable) level ever recorded. 

A year on, the average house price had fallen to £286,276. Coupled with strong wage growth (around 7.0 per cent over the last year), as annual earnings reached £43,090, the house price to income ratio fell to 6.7.

Although improved, this is still higher than the ratio of 6.2 recorded in early 2020.

But the Halifax admits that the affordability improvement impact has been offset by rising mortgage rates.

Typical monthly mortgage costs have increased by 22 per cent over the last year, from £1,020 to £1,249. That’s based on the typical monthly cost of a five-year fixed rate mortgage, with 25-year term and a 25 per cent deposit (average interest rates of 2.9 and 5.0 per cent respectively). 

That equates to mortgage costs as a percentage of income rising from 30 to 35 per cent over the last year.

Compared with the start of 2020, on the same basis, the monthly cost of a typical mortgage has now increased by 65 per cent (from £731 based on an average interest rate of 1.7 per cent) when it made up 23 per cent of average earnings.

The Halifax says: “While those figures are stark, they are not without modern precedent. Looking back to the previous peak in house prices in 2007 – prior to the recent era of record low interest rates – the house price to income ratio was 6.4. However the typical cost of a mortgage as a percentage of average earnings was actually higher than today’s 35 per cent, at 37 per cent.” 

This was based on a 2007 average house price of £192,943, earnings of £30,262, a mortgage rate of 6.1 per cent, and a monthly mortgage cost of £941.

Halifax’s mortgages director, Kim Kinnaird, says: “The sharp rise seen in interest rates over the last year has meant the sums now look very different for both homebuyers and those looking to remortgage. Typical monthly mortgage payments are up by around a fifth, which is a big jump at any time, but particularly during a wider cost of living squeeze. 

“We should remember the preceding 15 years have been characterised by historically low interest rates. Mortgage costs as a proportion of income are now comparable to those seen in 2007, despite the significant rise in house prices seen over the last decade and a half.

“Of course much has changed in the housing market and wider economy since then. Banks carry out much tougher affordability checks to make sure borrowers can manage repayments when rates go up, and the average loan-to-value is considerably lower.”

Source: Halifax House Price Index / ONS

Source: Halifax House Price Index / ONS