housing affordability
Measures of housing affordability - the issue of housing affordability has become central to explaining changes in total housing demand in recent years. The issue is really important when considering the geographical mobility of labour. The surge in house prices in the south east during 2000-2001 has contributed to worsening affordability for people working in the public services.
Affordability can be expressed in several ways.
House prices and average incomes
One approach is to calculate the ratio of house prices to average incomes. Because most homes are purchased using mortgage finance, if prices are low relative to incomes, this encourages people to move up the housing ladder into more expensive properties. This then opens up the supply of lower-priced housing on the market and provides incentives for younger first-time buyers to find their ideal starter-property.
Percentage of income taken by mortgage interest repayments
A second approach in assessing housing affordability is to measure the percentage of household disposable income taken up by monthly mortgage repayments. Again when prices (and interest rates) are relatively low by historical standards, potential home buyers will be attracted into the market in the expectation that they can comfortably keep up with their mortgage commitments.
Mortgage interest rates - lower mortgage rates stimulate higher demand for all types of housing because they reduce the debt-service burden on a housing loan.
One feature of the UK housing market in the latter part of the 1990s was greatly increased competition between mortgage lenders including the entry of new mortgage finance providers from other countries inside the European Union and the opening up of mortgage finance via the internet. Thousands of existing homeowners took advantage of the chance to re-mortgage their properties with a new finance supplier and reduced their monthly repayments at the same time.
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