ONS: house prices rise 8.3% in England, spelling more trouble for first-time buyers

David Kingman looks at yet another indication that the cost of housing is continuing to rise in EnglandIF_blog_monopoly_houses

Average house prices in England rose by 8.3% during the year to November 2015, according to the latest House Price Index from the Office for National Statistics (ONS). Is this more bad news for young people trying to get on the property ladder?

First-time buyers

The House Price Index, which is compiled using data from the regulated mortgage survey by the Council of Mortgage Lenders (the mortgage market’s main industry body), shows that average house prices across the whole of the UK rose by 7.7% in the year to November 2015. As you might expect, the nationwide averages are heavily skewed by the data for London and the South-East, where prices rose by 9.8%; removing those two regions from the data reveals that prices rose by an average of just 5.8% across the rest of the country.

The increase in prices paid by first-time buyers was slightly less than the overall increase, but still significant at 7.4%. This meant that the average price paid by a first-time buyer across the whole UK in November 2015 was £221,000 – roughly ten times the median average salary of the typical full-time worker aged 22–29, according to the provisional results from the 2015 Annual Survey of Hours and Earnings.

What about young people who have to rent while they save for a deposit? ONS data have also recently shown that average rents went up by 2.7% in England in the year to December 2015, with a rise of almost 4% in London, putting more pressure on the monthly outgoings of young people who are stuck trying to get on the property ladder.

The bigger picture

Given economic trends over the past 25 years, most of us are used to the idea that house prices practically always go up. However, what makes these figures particularly striking is the broader economic backdrop against which they have been recorded.

Firstly, if you look at inflation – the general measure of all prices across the economy – then 2015 was a remarkable year in a completely different sense. Growth in the Consumer Price Index (CPI) in the year to December 2015 was just 0.2%; this means that throughout the whole of 2015, prices in general barely rose at all.

Secondly, the data on earnings growth referred to above suggests that, across the whole economy, average weekly wages rose by just 1.8% between April 2014 and April 2015, slightly above the long-term average of 1.5% a year which was observed between 2009 and 2015.

The fact that both rents and house prices appear to be outpacing earnings growth is a big concern, as it will make it even harder for first-time buyers to find housing they can afford. The fact that average earnings are now rising more rapidly than general inflation should make people feel wealthier but, if the amounts they need to pay in rent or save towards their deposit are going up even more quickly, this won’t happen – with negative consequences for the broader economy as a whole.

This may help to explain why, as the ONS notes in their commentary that accompanies the House Price Index, demand for mortgages currently appears to be slightly subdued, despite relatively low unemployment and positive earnings growth. They suggest that higher prices are the result of low rates of new building and a shortage of secondhand properties coming onto the market. As has been the case for a long time, unless we start building new homes, then the runaway growth in house prices looks set to continue.