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UK Property Prices Climb 200% in 20 Years, Far More Than Wage Growth.
By: CIFER | Updated July 6th 2021

Since the new millennium, demand for UK properties has show little sign of slowing down, but how much further can it go before it becomes unaffordable?

You might think Covid would surely slow down demand as the nation goes into lockdown, however momentum in the property market failed to halt with prices rising 5.7% in 2020 alone (ONS). The break in certain tax forms given by the UK government helped boost the market for buyers preventing any downturn in prices during the pandemic. Further assistance has been announced by the Rishi Sunak last week, dropping deposit requirement to just 5% and extending the tax breaks on property purchases.

This is all well in the short run but it has to be acknowledged the growth in property prices has been largely fuelled since 2008 by record low interest rates, and now further incentives in a bid to stabilise the property market following on from the covid pandemic.

With the UK housing market having a workforce of an estimated 500,000, 

it comes as no surprise the chancellor has thrown in a lifeline supporting businesses and securing employment. However, one can't help but wonder, what the long term implications look like, in particular when the furlough scheme ends in September. Will low deposit rates and interest rates be enough when the employment rate is bearing the brunt of the pandemic? 

Although, the real issue with house prices now is with price/wage ratio in the UK. Nominal property prices are rising at an alarming rate in comparison to nominal wage rates which gives little support to the current market trend.

UK property 3.jpg

Source: UK House Price Index from HM Land Registry, Registers of Scotland, Land and Property Services of Northern Ireland and Calculated by ONS.

At the end of 2000, the average wage in the UK was £18,848 (median figure) against an average house price of £93,624, gives a price/earnings ratio of 4.97.

By 2020, average wages had risen to £31,461 but house prices took off with an average of £245,000 by September 2020, giving an price/earnings ratio of 7.79.

Wages chart UK 3.jpg

Source: Office for National Statistics (UK): 1999 -2020

Since the onset of coronavirus, interest rates in the UK have been dropped from 0.75% to just 0.1%, encouraging borrowing and as such, consumer spending. Further rate cuts into negative territory seem unlikely at this stage as this would have implications across the economy, however the QE programme will likely stay in place until an economic recovery is more pronounced. However, on the other hand, such low rates for prolonged periods of time coupled with increased QE gives off warning signs to overshooting inflation expectations. 

Similarities in the US

Stagnant wage growth over the past decade has made property unaffordable to the low income workers as real estate continues to rise. This raises question over sustainability of this trend and the FED remain hesitant to raise rates, and showing little concern over frothy asset prices. The graph below illustrates how rising asset prices has caused a deterioration in the purchasing power of income.


In short, as the economy recovers from the coronavirus pandemic, governments will have more stable grounds for raising rates in the future with implications on property prices, although at this stage, this seems like a distant milestone.

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