Disappointing news about UK household income

Since the recession of 2007/8 there is no doubt that household incomes in the UK have been under significant pressure and this has played a role in the performance of the UK property market. A report today by the Institute of Fiscal Studies (I FS) casts a very interesting light on the subject of household income and how it has performed since the recession. So who are the winners and losers when taking inflation into consideration?

Over 60s benefit the most

Many will be surprised to learn that the over 60s will have higher income in 2014/15 compared to the 2007/8 tax year. Indeed the median income for those in the age group 22 to 59 will register a reduction this tax year compared to the period just prior to the recession. It is also interesting to see that living standards are rising slower than many had expected because of weak earnings growth and the U.K.’s inability to increase productivity.

There is also anecdotal evidence that the UK government’s battle to reduce the budget deficit, via tax increases and benefit cuts, is eating into household income to a greater extent than many had expected. Initially it was thought that those towards the bottom end of the income spectrum would fare worst under the current regime but it seems that in the age group 22 to 59, assuming the same inflation rate for each household, the rate of inequality has fallen. However, if you look at the actual figures it shows that an increase in everyday costs such as food and energy prices has impacted those on lower incomes to a greater extent.

How does this impact first time buyers?

It is obvious that an increase in average household income is extremely beneficial for the first time buyer’s market because it means that first-time buyers can borrow more money. So if we assume that under pressure household incomes are preventing many first-time buyers from climbing aboard the ladder then why has the UK property market been so strong?

If we look at the figures, London is perhaps the only area to see house prices rebound to anywhere near prerecession levels therefore the affordability factor, taking in general house prices and household incomes, may not have changed dramatically since 2007/8. Is it therefore safe to assume that the affordability factor for first-time buyers in the UK was perhaps worse than many realised back just prior to the recession?

The future for first time buyers in the UK

The IFS report casts a very interesting light on the UK real estate market and the fact that the affordability factor for first-time buyers was probably no better back in 2007/8 than it is today. Is it therefore safe to assume that the UK property market is one which no longer depends upon first-time buyers and so-called “new blood” with foreign investors and domestic investors taking up the slack?

As and when we do see a recovery in average household income it will be interesting to see whether the affordability factor for first-time buyers improves. At this moment in time this seems highly unlikely because by the time average household incomes have significantly improved there is every chance that UK property prices will have made another upward move. Are first-time buyers set to play a diminished role in the UK market going forward?