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Market Update 30th June 2025

Sign of the times

My son Alexander graduated from university recently and has been living with me. We were due to meet up and I was uncharacteristically late, so he sent me a message to say he would get a coffee and wait. A few minutes later I got a more anguished message saying he had paid £5 for the coffee in Notes. He even had £5 hidden in his wallet for just such an emergency but found out the hard way that Notes don’t take notes and it came out of his bank account.

We tell our younger generation to stop spending money on coffee, avocados and Netflix to live better and buy houses. But Alexander could buy a ruinous £5 coffee every day 365 days a year and it would take him over 65 years to fritter away an average deposit in London. I’m not sure coffee is the problem.

Why are houses so expensive whether buying or renting? Various people index and measure these things, but the average house price in the UK is around £270,000. The average salary is around £35,000 – a multiple of 7.7x. According to the Halifax, the average first time deposit in the UK is about £60,000 or 33 years of coffee. We will leave aside where someone earning £35,000 might find £60,000 net of tax.

The average price less the average deposit leaves you with a £210,000 mortgage. This is 6x the average salary. The Bank of England mandates that no more than 15% of new mortgages can be more than 4.5x salary. It is safe to assume recent graduates loaded with student debt are not likely to be in this 15% of exceptions.

I hear about foreign buyers. King’s College estimate foreign buyers have added about 20% to UK house prices. I hear about buy-to-let. Some of this overlaps with foreign buyers. I hear about “the bank of mum and dad”. We had a long period of low interest rates. The UK has relatively low and steady unemployment. But it seems to me none of these things really explain how housing has become so fundamentally unaffordable to younger or average people, or how the market stays like this without correcting, or why we have allowed it to happen.

At the same time, I see a growing number of headlines about younger people being replaced by AI in professional services of all kinds. Almost any graduate role involving a computer appears to be somewhere near the front line of these changes.

Government policy has not always helped. The Right to Buy scheme in the 1980s reduced the amount of available social housing, pushing people into the private sector and increasing prices. Help to Buy increased demand and prices. Rents are also rising, as higher prices have pushed more people into renting which makes saving more difficult. We could write a long list.

The underlying issue is quite well known – a lack of supply, while a lack of productivity growth has slowed wage growth since the GFC. But it still surprises me that the multiples end up so stretched while the market continues to function.

The UK has not built enough houses for a long time especially in more popular areas such as the south-east. The planning system is restrictive. Council tax may be unpopular with many but is an unusually low property tax and a small fraction of your council’s budget. A personal view is that no government of any kind is going to sink the value of your house on purpose through policy, such as really building a lot more houses.

A more realistic alternative might be a plan to increase productivity to help wages to catch up. Having said that, we have had the Bank of England Governor Andrew Bailey out this week saying wage growth needs to come down in line with the 2% inflation target. Wage growth is still up around 5% depending on what measure you look at and he thinks that is too much, so no help there.

It hasn’t always been like this. Alexander and I have developed a proprietary beer index. When I was at university, I paid £1 a pint and £22 per week rent in a shared house just outside the city centre. Rent was twenty-two pints per week. Even Starbucks didn’t exist in the UK, so I don’t have a coffee price back then. We think beer in London is about £7 these days, so if the beer / rent exchange rate had remained constant then rent should be something like £150 per week or about £650 per month.

An average graduate salary in London is about £30,000 today – not too far from the national average – which would get you a bit over £2,000 per month in the bank after tax. £650 per month in rent is about a third of this and would be entirely affordable if it were true, but it isn’t.

According to the website SpareRoom, the average rent for a room in London (a room in a shared flat, not the whole thing) is £982 per month. If you wanted that to be one third of your net pay, you would need to earn about £44,000.

Robert Fullerton – Senior Research Analyst

IMPORTANT INFORMATION

This is a Financial Promotion. Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS.

This document’s content should not be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The information and opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC25440

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