150716 House price earnings ratio
  • The method behind this madness. For a recent report, the Office for National Statistics knocked together a graph comparing house prices with average earnings. This was better than the similar and frequently-used “affordability ratio” produced by Halifax – which doesn’t consider earnings overall, only those of men in fulltime work – but it didn’t cover every region of the United Kingdom. We’ve rectified that by sifting through past editions of the Annual Survey of Hours and Earnings (table 7.7a, gross annual pay, if you’re interested), as well as the current edition of the House Price Index (table 23), to produce the graph above. It’s a one of a kind.
  • Northern Ireland’s boom and bust. Anyway, the first thing that stands out from the graph is the inverted V-shape for Northern Ireland. In 2000, that region’s average house price was 5.6 times greater than average earnings. By 2007, that figure had climbed to 13.4, the highest of all the regions. Last year, it was back down to 7.7, the lowest. This was mostly due to Northern Ireland’s horrendous housing boom, which saw average prices rise by 68 per cent between 2000 and 2007, and then the crash that followed. Thousands are now trapped in negative equity. It’s one of the most overlooked consequences of the financial crisis, at least in Westminster.
  • London… More recently, London has scrambled to the top of the pile (or descended to the bottom, depending on how you look at it). Its average house price was 15.5 times greater than average earnings in 2014 – even though average earnings in London are, at £30,338, higher than anywhere else in the country. But that ain’t got nothing on some of the capital’s boroughs. According to figures from the Department for Communities and Local Government, the ratio in Kensington & Chelsea is closer to 26.5. Yep, twenty-six-point-five.
  • …and its environs. And so people who can’t afford to live in Kensington & Chelsea live in Barking & Dagenham. And people who can’t afford Barking & Dagenham move out of London altogether. It’s no surprise that the South East and the South West are towards the top of the pile too. These are, in part, areas of London overspill. People want to live near the capital, but they cannot always afford the capital’s prices. This brings their demand crashing into the supply of regions nearby. Prices go up, up and up.
  • Northern Powerhouse prices. Which is pretty obvious, really. But the reason I mention it is George Osborne’s grand plan for the north of England. If regions such as the North West and North East are resuscitated as he wants, and as we should want, what will it mean for house prices? Will they go up with the area’s desirability? Will earnings keep pace, meaning that affordability ratios stay the same? Will supply increase with demand? These are the difficult questions that come with economic success. Let’s hope not just that the northern regions soon have to ask them, but that they have answers too.