The affordability calculation used in this analysis measures the degree of difficulty faced by a potential new borrower in entering the local housing market dependent on current local average house prices and average earnings, and mortgage rates. The calculation is based on a single income and is, therefore, conservative. House prices across the UK fell by an average of 16% in 2008 and are expected to decline again in 2009. Prospective homebuyers should factor the likelihood of further house price falls into their calculations when deciding whether or not to buy.
The proportion of disposable earnings devoted to mortgage payments - a key affordability measure - has fallen significantly over the past 18 months. Nationally, typical mortgage payments for a new borrower have fallen from a peak of 48% of average disposable earnings in 2007 Quarter 3 to 31% in 2009 Quarter 1. Notably, mortgage payments relative to earnings are now below the long-term average of 37% recorded over the past 25 years.
The affordability situation has improved in all 12 UK regions since 2007 Quarter 3. The biggest percentage falls in average mortgage payments as a proportion of average disposable earnings have been in Northern Ireland (from 63% to 37%) and London (from 56% to 34%).
Mortgage payments account for the lowest proportion of disposable earnings in Yorkshire & the Humber, North West and Scotland (all 26%).
Falling house prices and reductions in mortgage rates have led to improvements in affordability in all the local authorities in the UK since mid 2007. More specifically, 217 local authorities (LAs) - 53% of the total 407 LAs surveyed - have experienced a fall in mortgage payments as a proportion of average earnings of at least 25% between 2007 Q3 and 2009 Q1. Six local authorities have seen an improvement of 40% or more.
At local authority level, the biggest improvement in affordability since 2007 Quarter 3 has been in East Hampshire where mortgage payments as a percentage of average earnings have fallen from 62% to 35%. Ards in Northern Ireland, West Devon and Chiltern have seen the next biggest improvements. (See Table 1)
The most affordable local authority in the UK is Copeland in Cumbria; typical mortgage payments in 2009 Quarter 1 accounted for 22% of average local earnings. Shetland Islands and Renfrewshire (both 23%), both in Scotland, are the next most affordable. (See Table 2)
The least affordable local authority in the UK is North Cornwall; average mortgage payments on a new loan in 2009 Quarter 1 accounted for 63% of average local earnings. South Buckinghamshire (62%) and Guildford (58%) are the next least affordable. Many of the least affordable local authorities are either commuter areas or have a high proportion of second homeowners. (See Table 3)
Martin Ellis, housing economist at Halifax, commented: "There has been a marked improvement in housing affordability across the UK over the past 18 months. The significant reduction in mortgage payments paid by a typical homebuyer has resulted largely from the combination of the decline in house prices and the cut in interest rates to record lows. As a result, housing is at its most affordable for almost seven years. Notably, mortgage payments for a typical new borrower as a proportion of average earnings are now below the average for the past 25 years.
"Despite the improvements in affordability, conditions in the housing market are likely to be tough during the remainder of 2009. Increasing unemployment, low consumer confidence and the constraining effects of the continuing dislocation of the financial markets on the availability of mortgage finance are all likely to exert downward pressure on the market over the coming months. Prospective homebuyers should factor the likelihood of further house price falls into their calculations when deciding whether or not to buy."
