House prices continue to rise in the UK, so much so that the ratio has risen to 8.8 times the average local salary. It’s a trend that won’t stop, and the implications for mortgage buyers are worrying.
Proportionally Larger Deposits
Firstly, the relative size of a deposit increases with the house price. The further that sum gets from your yearly income, the harder it will be to save for anything worthwhile: 5%, 10%, 15% becomes thousands more pounds than the previous generation. First time buyers will find themselves in a catch 22; they must save longer for their deposit, and in doing so spend more on rent. That can be frustrating for those who want to spend their money on tangible assets.
Longer Payment Period
Deposits are the short-term issue of this house/salary imbalance. Looking ahead, your mortgage will last longer, so naturally you’ll pay more overall interest than you would have in a short period. Again, this kind of snowball effect puts people in a rut. Savings you would otherwise spend on a pension, kids’ education, extensions or travel instead go towards the surplus costs of an inflated mortgage. That’s the kind of damage that ripples and affects more than one generation.
If mortgages are consistently in line with local salaries, then this wouldn’t be a problem. All of these stem from the fact that they’re growing at a pace that earnings cannot keep up with.
For regional comparison of the house/salary gap, check out this great article from The Guardian. Not only do they visualise the gap, they also provide background context on how that has happened since the financial crash.
Have you found this to be true? Let us know in the comments. It’s an interesting and relevant issue worthy of discussion.