Interest Rate Damage - huge regional variations to housing market

The impact of higher interest rates isn’t felt equally across the country, according to data from the Halifax.

Despite recording one of the worst regional performances of any UK region or nation over the last year (losing 2.6 per cent on the average house price), London remains by far the most expensive place in the country to buy a home, with an average property price of £533,057. 

Based on regional earnings, this puts the house price to income ratio at 9.3 (compared to 10.0 a year ago), the highest of any region. Typical mortgage costs in the capital now account for 49 per cent of earnings, up from 42 per cent last year - again the biggest proportion of anywhere in the UK.

By contrast, the North East of England remains the most affordable UK region in which to buy a home, with an average house price of £168,240 and a house price to income ratio of 4.9. This means that, along with Scotland, it is the only part of the UK with a ratio lower than 5.0, having fallen from 5.2 over the last year. Mortgage costs represent 26 per cent of average incomes, also the lowest anywhere in the country (up from 22 per cent last year).

Greater London and the South East of England account for the majority of the least affordable local areas to buy a home. 

Westminster and City of London tops the table, where average prices are 16.0 times average earnings, followed by Kensington and Chelsea (15.7) and Moles Valley (13.2).

At the other end of the scale, northern locations dominate the list of most affordable local areas. Inverclyde on the west coast of Scotland is the most affordable place in the UK to buy a home, with typical house prices just 2.9 times average earnings, the only local authority area with a ratio below 3.0. It’s followed by Dumfries and Galloway (3.2) and East Ayrshire (3.3), with the most affordable area outside of Scotland being Hull (also 3.3).

Surrey Heath in the South East has seen the sharpest improvement in the house price to earnings ratio of any location over the last year, falling from 11.8 to 9.6. Marginally behind on the list is Cambridge in Eastern England, also falling from 11.8 to 9.6.

Bucking the trend, Pembrokeshire in Wales saw the biggest deterioration in house price affordability of any local area over the last year, with the house price to income ratio rising from 5.8 to 6.9 (+1.1).

At a national level, the typical first-time buyer property price is 5.4 times average earnings, down from 5.8 last year.

However overall mortgage costs have increased by 25 per cent for first-time buyers over the last year, from an average payment of £1,095 per month up to £1,364, as a result of higher interest rates. 

As a proportion of income, monthly mortgage costs have risen from 30 to 36 per cent. This is based on typical first-time buyer property prices and the average interest rate for a five-year fixed deal, with a 25-year term and 5.0 per cent deposit (average interest rates of 3.5 and 5.7 per cent respectively).

The real-life financial situation for many first-time buyers will be quite different though, with recent Halifax research showing that almost two-thirds are joint applicants and able to call on more than one salary.

According to UK Finance, the average household income of a first-time buyer mortgage application last year stood at just under £60,000, which would put the equivalent house price to joint-income ratio at around 3.8.

Recent industry figures also show that more than half of first-time buyers are now opting for 30-year mortgage terms. This would reduce the average monthly mortgage payment from £1,364 to £1,265.

Source: Halifax House Price Index / ONS