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A Study On The British Housing Affordability This Report Analyses The Housing ...

A Study on the British Housing Affordability
This report analyses the housing market in the United Kingdom based on recent experience and projected economic trends. Cost of housing as a percent of salary is used to measure the relative burden of owning a home under a variety of conditions. Five scenarios are created and analysed where a 22 year old couple purchases three successively larger houses over a period of eight years. The couples enter the market at intervals between 1990 and 2004. Historic data are used for economic variables when available and, where not available assumptions are made. The study will find, not surprisingly, that the burden of the largest house is greatest in all but one case and that house price seems to have the greatest influence over burden.
An appendix Appendix I .rtf and a spreadsheet .xls are part of this report.
Background
Both the high mortgage rates in the early 1990s and the low recent mortgage rates have created an uncertain environment for house buyers, especially first time buyers. Between 1971 and 2000 first time buyers spent between 11.6% and 26.3% of their gross income on mortgage payments as illustrated below. In the graph and for the rest of this paper burden is defined as:

The maximum, of 26.3% in 1990 where this study begins, represents a year where both housing prices and mortgage rates peaked.


Current estimates have first time buyers spending 40% of their take-home pay on mortgages (this translates to about 25% of gross pay) indicating that conditions similar to 1990 may prevail.
Although historic long-term trends call for salaries and housing prices to increase, the period between 1990 and 2004 saw housing prices decrease then increase. Mortgage rates over the last three centuries have averaged 6.0%; however during any fifteen-year period, these can and do fluctuate sometimes radically. The period between 1990 and 2005 was no exception seeing mortgage rates range from 14.6% all the way down to 3.7%.

Data, Assumptions and Method
Data
Historic data were collected for the years 1990 through to 2005 for: average annual wages, housing prices, mortgage rates, and inflation.
The average house prices were obtained from HBOS. The average household income for a couple under the age of 30 according to National Statistics was 28,912 in the year 2001. This was used as a pivotal value and adjusted for each year by the AEI (average earnings index). Historic inflation rates were taken from national statistics. Mortgage rates used were the annual Bank of England December 31 repo rates.
year
average starting wages
housing prices
mortgage rates
inflation

1990
17,752
68950
14.64%
7.04%

1991
19,109
68130
11.56%
7.41%

1992
20,244
64309
9.42%
4.30%

1993
20,826
62455
5.88%
2.50%

1994
21,601
62750
5.34%
2.07%

1995
22,266
61666
6.57%
2.63%

1996
23,069
64441
5.88%
2.

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