| From www.domusinc.gr|
BEFORE you gaze in horror or delight at the graph below, be aware that it comes with a health warning: this is a “what if” chart. It shows how much house prices would rise if we were to spend 30 per cent of our income on housing. Its creators do not suggest that this will happen, they merely point out that there is the potential for values to rocket, just as there is the potential for them to crash.
How likely is this to happen? Your guess is as good as that of any highly-paid analyst, given the repeated failure to forecast the strength of the UK property market.
The figure of 30 per cent represents the average proportion of take-home pay spent on a mortgage during the high-inflation 1970s. As interest rates have fallen, so that average has drop-ped to about 24 per cent for existing owners and 26 per cent for first-time buyers, though that disguises sharp regional differences. In Greater London existing owners and first-time buyers already spend more than that. Other expensive southern regions are not far off the mark. But in Yorkshire and Humberside, traditionally England’s cheapest region, buyers spend less than a quarter of their take-home pay on housing. That is despite the huge price rises which have seen spending leap in the past 18 months.
London buyers spend so much because they have to in order to afford any sort of quality of life. Demand for property overwhelms supply, as it does in most economically buoyant European cities, from Helsinki to Madrid.
In London the market started to hit the buffers most recently when spending on property reached 37 per cent of take-home pay. (It rose to the dizzy heights of 50 per cent-plus in 1990.) That figure may mean nothing — the City was shedding jobs at the time — but it may prove a better guide to the limits of affordability than the over-used house-price-to-income ratio. The question, then, is whether the rest of the country will follow suit. The appetite for property appears insatiable. It has reached such heights that the Venmore Partnership, the Liverpool auctioneers, is today using security staff to control the crowds at its biggest auction yet.
It has been suggested that some of the recent record prices being paid for lots on Merseyside are by drug dealers laundering their money. This is firmly rejected by Philip Cassidy, Venmore’s auctioneer. He said his buyers were not paying deposits in bundles of cash — if they did, he would report them to Customs and Excise and the police.
“The reason demand is so strong here is because prices were too low,” he says. “Most of our regulars were getting returns of 20-30 per cent. Now returns are lower, but they still look good to investors from other parts of the UK.”
Though the North-South divide remains wide in terms of regional averages, it narrows sharply when comparing houses in good locations. Detached houses in Newcastle are about 2 per cent cheaper than those in Bristol, whereas flats in Newcastle cost 32 per cent less. Good properties are scarce everywhere. The real difference is that there are still cheap properties to be found in most parts of the North, but very few anywhere in the South.
What the researchers at FPDSavills, who produced this graph, are questioning, is whether in an era of low supply buyers everywhere will pay what they have to for a good home. Whether they should is another matter.
Every extra pound spent on a mortgage is a pound less to spend on a car, a weekend break or a pizza. There would be a knock-on effect in other parts of the economy, which might impact on jobs — the ultimate drivers of house-price rises. There is the even bigger risk that buyers will overstretch themselves today, forgetting that inflation will not bump up their wages or erode their debt. One third of current income will still be a big chunk of money in 15 or 25 years’ time. Whether any of us fully appreciates that point remains to be seen.
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