Property value vs average earnings: Which is growing faster and what does that mean for you?

15th May 2018

Which do you think is growing faster; your salary, or the value of your home?

That depends on where you live and how the market is performing, but the good news is, for the most part, UK salaries are now increasing at a faster pace than house prices.

Less than one in five areas (18%) have seen property values increase more rapidly than average earnings in the past 24 months, according to Halifax.

For years, house price growth has outstripped earnings growth. That’s dangerous as, the high cost of housing, compared to a stagnating income has meant that it has been increasingly hard for first-time buyers in some areas to get a foot on the property ladder.

The fact that house price growth has now been overtaken by the rise in average earnings is therefore good news, especially as we are also seeing real terms wage growth outstripping inflation.

But what does this mean for you?

If you’re a first-time buyer:

Wage rises which are outpacing the growth of property values, is good news for those looking to buy their first home soon. If you’re now enjoying faster growth in your wage, this should give you the opportunity to save more toward your deposit. The extra room in your budget will also give mortgage lenders more faith in your ability to keep up with repayments and could lead to better interest rates being offered.

If you’re a second-stepper:

Current homeowners with a view to moving home face both advantages and disadvantages. When selling your current home, you may find that your property has not achieved the growth necessary to allow you to move to your preferred new home. However, growth in average earnings could ease this somewhat, giving you extra room in your budget for both adding to your savings and making mortgage payments.

In addition, purchasing your second home could be less costly than first thought. In fact, taking advantage of the market whilst it is slow could mean that you are able to afford your next home sooner than you originally planned.

If you’re preparing for retirement:

Getting ready to leave the workplace behind and enjoy some time to yourself is exciting, but how does your home and income factor into that? You may be considering selling you current home and downsizing to release some extra spending money, or perhaps you are thinking about equity release. A slow housing market means that you might not see the returns you hoped for, from your property.

However, the increases in average earnings may enable you to contribute more toward your pension before giving up work altogether. Saving as much as you can now will give you more to support and enjoy your ideal lifestyle later.

If you’re already retired and looking to leave a legacy:

Thinking about what you will leave behind for your loved ones when you die might not be a pleasant task, but it is necessary if you want to avoid leaving your family with a large Inheritance Tax (IHT) bill. The value of your property will inform the decisions you make about what you will leave and how you will do so.

If you are already retired, an increasing average income is unlikely to affect you. However, it may affect the tax payable by your beneficiaries. This is especially pertinent if you will be leaving money in pensions, as they may have to pay Income Tax at their normal rate, which could be higher if they have been fortunate enough to receive regular salary increases.

The other side of the coin

For the 18% who have property which is increasing in value faster than your pay packet, all is not against you.

You may have the benefit of owning a home which is in demand; and being able to command a higher price. So, even though your income may not have seen a dramatic rise recently, you could still finance your big plans, through mortgaging or even downsizing to release equity.

Of course, those options will not be the right fit for everyone, but with the help of a financial adviser or planner, you can find solutions that suit your situation, whichever side of the story you are on.