London average House Price to Median Earnings ratio
Exploring the evidence on London average house price to median annual earnings ratio #pompompricing #ukmortgages
Currently the London average house price (“house price”) to annual median earning of an individual1 (“earnings”) ratio is significantly high at around 12x as of end of 2022. This figure is based on taking on an annual basis the average London house prices2 compared to the median annual earnings3 from 1968 to 2022.
This house price to earnings ratio is informative as it can compare how resilient are London homeowners or future buyers in buying properties. For example, a ratio significantly above the historic median would be indicative of a property bubble. Inversely, a ratio below the historic median would suggest a property market near the bottom (assuming ceteris paribus).
Assessing the London Property to Annual Earnings Ratio
Figure 1 shows us that the ratio is significantly above the historic median of 5.1x (since 1968 to 2022), indicative of a current property bubble. Now a key question is whether the current ratio is so out of whack that it would (i) decline to the historic median (ii) fall to the same level before the Great Recession at 8.8x or (iii) drop to the same levels comparable to other mortgage crunches in 2007/2008 and 1988/1989. Alternatively, could it be the current ratio remains the same and continues to increase?
Although we would expect the latter to apply given a ratio of 11.9x and above is likely to precipitate a mortgage crunch as households would struggle to pay their mortgages in light of rising interest rates.
The calculation for annual earnings for an individual was based on men weekly gross earnings multiplied by 52.
https://landregistry.data.gov.uk/app/ukhpi/browse?from=2022-03-01&location=http%3A%2F%2Flandregistry.data.gov.uk%2Fid%2Fregion%2Funited-kingdom&to=2023-03-01&lang=en
https://data.london.gov.uk/dataset/earnings-workplace-borough. By using this figure, gross annual earnings covering 1968 to 2022 were calculated by taking the median weekly earnings multiplied by 52