It was recently reported that average pay growth had risen above inflation for the first time in almost two years, with wages up an annual rate of 7.8% between June and August, whilst annual inflation for August stood at 6.7%.
For those earning the minimum wage though the growth has been even better these past 12 months. The minimum wage was set at £10.42 per hour (for over 25’s) in April, which was a 9.7% increase on the previous level.
Nevertheless, with the average property in the UK selling for £291,044, it would take a minimum wage earner 27,931 hours of work to buy that average home outright. That’s the equivalent of working for around 13.5 years based on a 40-hour working week (ignoring tax and not spending any money on, say, living…).
When the minimum wage was introduced in April 1999 (at a rate of £3.60 per hour for over 22-year-olds) the average home in the UK sold for just £75,995. That would have meant a minimum wage earner needed to work for 21,110 hours to afford the average home in 1999 using the same calculation (a little over 10 work years). So, whilst the minimum wage has increased by 189% since it was introduced, the average property in the UK is still less affordable now having increased by an inflation-busting 283%!
Interestingly though, the greatest increase in property prices came immediately after the minimum wage was introduced. In fact, when the minimum wage was increased for the first time in October 2000 (by a measly 2.8%), house prices had already leapt by 23%! Only once out of the first eight times that the minimum wage was raised did it increase by more than the house price growth for the same period, whereas since then it’s swung the other way; with nine minimum wage increases being above house price inflation, and seven falling short of this.
I was quite surprised to see that in the past ten years the minimum wage has in fact very nearly kept up with house prices; since 2013 the minimum wage has increased by 65% (from £6.31ph to £10.42ph), whilst house prices have increased by 66% (from £175,378 to £291,044). Even more of a surprise was that in the last five years the minimum wage has actually grown more than house prices, with the minimum wage increasing by 33% versus a 29% increase in property prices.
With house prices expected to stall in the short-term and overall inflation (and political posturing) meaning the minimum wage seemingly only goes in one direction (up), it suggests housing may become a little more affordable for the lowest earners. A rise in the minimum wage could of course have the effect of flaming inflation, whilst also underpinning house prices against any substantial falls.
So, has the minimum wage helped wannabe homeowners? Well, unless it’s a coincidence, the introduction of the minimum wage coincided with a strong increase in house prices. The 2008/09 financial crisis brought things back into line somewhat and since then those on minimum wage haven’t actually lost out in the fight to keep up with house prices.
The problem is that buying a property has largely been out of reach for those on the lowest incomes in the past, which continues to be the case now. The income affordability requirements from lenders mean access to mortgages can be difficult, and that’s before saving for the deposit and other costs associated with buying.
