Affordability for city dwellers in Scotland has deteriorated, according to the Bank of Scotland Affordable Cities Review issued today. Or has it?
The bank reports that the average cost of a home in Scotland’s cities has risen to 5.24 times gross annual average earnings, up on 4.89 times earnings recorded this time last year. The change is driven by a recovery in prices over the last 12 months, although some areas have seen a more pronounced rebound than others.
But although house prices rose last year, a corresponding decline in mortgage rates means that affordability in terms of our monthly payments has hardly changed and remains well below its long run average.
The Halifax estimates that mortgage payments in Scotland now account for 22% of disposable income (i.e after tax has been deducted). That’s not far above the all-time low of 19.1% in 2013 and well below the average of 29%. On that measure, property has rarely been more affordable.
Now, commentators traditionally discount this measure of affordability because it fluctuates with changes in interest rates. But they are wrong in principle and in practise. In principle, it doesn’t matter how much we borrow, it matters how much it costs us to service that borrowing. In practise, repayments can fluctuate and we should take that in to account when working out what we can afford, but today mortgage rates look set to remain low for an extended period.
According to the Bank of England reports that you can now get a 10 year fixed rate mortgage with an interest rate of 3.64% provided you have a 25% deposit. Let me say that again – you can borrow money for the next 10 years with an interest rate fixed at little more than 3.5%.
That is a measure of what The City thinks will happen with interest rates in the medium term. Indeed, the Bank’s own inflation report says that the markets expect the bank base rate in 2017 – two years from now – to be just 1.1%
Given how low interest rates are, it’s unlikely that affordability is going to improve further. But a recovery in the house price/earnings ratio (the average house price as a multiple of earnings) back to historic norms does not necessarily signify that property is becoming unaffordable.
For the record
For the record, this is the PE ratio for Scotland’s seven cities. The average of 5.24 times income is below the peak of 6.12 in 2008 and is also significantly below the current UK city average of 6.12.