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That something has yet to be identified. In the meantime we owners and buyers are left worrying. How are we to reconcile what seem to be sound reasons for borrowing and buying with this intangible threat to the pillar of our personal finances? After years of false alarms, is this the real thing? One answer lies in the chart to the right. Using figures on real sales from the Council of Mortgage Lenders, statisticians at Hometrack have calculated how affordable property is to today’s buyer. The answer is, “very”.
Yes, houses cost unbelievably big sums of money; yes they are higher in comparison to the simple — if not simplistic — standard measure of income than they were at the time of the last property crash, but we can still afford to buy them because mortgage rates are so low. Not only are they low now, but it seems that we trust the Bank of England to keep them that way.
The Hometrack figures take into account how much we are borrowing relative to our income and to the value of our property and at what interest rate.
By this measure, the least affordable moment in the past 20 years was the first quarter of 1991. If that moment is indexed at 100, we are now at 42. Put another way, property is 2.3 times more affordable than it was in 1991, even though it costs 2.03 times as much (according to the Halifax). However unlikely it seems, we have only recently passed the point at which affordability peaked.
This suggests that today’s buyers are not vulnerable to predicted rises in interest rates, which makes a rerun of the last crash unlikely. Also the Government is as anxious as homeowners to avoid repeating a situation in which house prices fell 27 per cent in real terms in three years. Before you say “Ah but”, there are inevitable caveats. Lenders’ data includes only those people who can afford to apply for a mortgage. In the case of first-time buyers, that is not very many. They currently make up 30 per cent of borrowers, compared with 51 per cent in 1991.
With no equity to fall back on, they are the people most troubled by predictions of doom from financiers such as Tony Dye, chief executive of Dye Asset Management. His claim last week that house prices would fall 30 per cent over the next five years leaves first-time buyers caught between the devil and the deep blue sea. Should they borrow more and risk seeing prices fall, or stay out of the market and watch house prices rise further out of reach?
This week’s daily diet of property- related surveys included one from the Yorkshire Bank, in which 41 per cent of first-time buyers said they would be willing to buy a home they did not like in order to get on to the property ladder. A similar proportion admitted that they were torn between saving for a deposit and the lure of the 100 per cent mortgage. Even those of us who disagree with Mr Dye would warn them to resist that temptation at all costs.
At the moment the gap left by first-time buyers is being filled by investors, who make up the market’s most worrying sector. Despite flat or falling rents and tumbling yields, there are still plenty of them. Last weekend another batch of new flats at Clarence Dock in Leeds was snapped up by investors, displaying great faith in future capital growth.
An even more powerful name than Tony Dye that has been associated with a house price crash (and other equally unpalatable matters this week) is the investment bank Goldman Sachs. Partial quotes taken from two research documents exaggerated the bank’s pessimism. They said: “On conventional measures, relative to income, the latest surge in the housing market has taken prices to precipitously high levels, similar to those reached at the peak of the late 1980s boom.”
The research note went on: “But these measures are simplistic. They do not take account of structural shifts in housing supply and demand and they fail to adjust for any change in the real, long-term cost of mortgage finance.”
The higher prices and interest rates rise, the more everyone will worry that the market will turn. In the meantime, don’t sell up or withdraw your offer, but do check out the mortgage tables to make sure you’re getting the best deal.
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