Why UK house prices have further to fall

Ben Chu

house prices 404 674643c 150x150 Why UK house prices have further to fallThere’s nothing like a few facts to illuminate a problem.

The National Housing Federation has published a study that finds the average house price in England in 2009 is 10.3 times the average income.

The average London salary is higher, but that doesn’t make housing in the capital any more affordable. In another study, the NHF finds that average house prices in London are 13.5 times the average London income.

The NHF spells out what this means. The gross household income needed to get a typical mortgage (90 per cent of house value, 3.5 times income) for the average home in England is £55,670 – more than twice the average income of £20,946. Lower value homes are out of reach too. The average price of a house in the bottom 25 per cent of values is £123,000.  The gross income needed for a typical mortgage on such a home is £31,629.

The figures for London are even more astonishing. The average house price in the capital is £363,043. To get a typical mortgage for such a property,  a household would need a gross income of £93,353. Average London incomes are £26,353. The average price of a house in the lower quartile of homes is £195,167. The gross household income needed to get a mortgage for such a home would be £50,186.

So the average first-time buyer who wants to buy a modest home in England (and who cannot access any financial help from relatives) needs to have an annual salary of around £31,000 (or to earn that sum combined with a spouse). To buy a house in London, they would need £50,000 a year.

Now consider, as my colleague Sean O’Grady has pointed out, that the whole market is sustained by a steady flow of first-time buyers.  If a home owner wants to move up the property ladder, they generally need someone lower down, or a new entrant, to buy their home. In the past, cheap credit has enabled these first-time buyers to bridge the gap between their incomes and house prices. But according to the Bank of England, the banks have begun restricting access to credit for housing. Interest rates have been slashed, but first-time buyers are still priced out. It’s not so much a problem of the price of credit, but rather the availability of it.

House prices reflect a shortage of supply, as the NHF is keen to stress. But they also reflect ease of credit. And they also reflect a surge of property speculation, particularly visible in the buy-to-let market.

Consider that research by the ONS and Nationwide shows house prices to be still above the long-run average in relation to earnings.

latest house price earnings Why UK house prices have further to fall

All this leads me to the conclusion that, constriction of supply and the specific pressures of the London property market notwithstanding, house prices are destined to fall further.

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  • davedavenotdave

    “the average house price in England in 2009 is 10.3 times the average income.”

    This stat is accurate, but misleading. One thing that’s never mentioned in this context is that, thanks to sexual equality and women entering the workplace, families now average well over one income per family.

    House prices are still high, but to some extent there has been a shift in what’s affordable as a multiple of average earnings, since average household income is no longer roughly the same.

  • davedavenotdave

    I know at least one who’s always been a Lib Dem voter. Counter-example says ‘all’ was a bit of an overstatement.

    I’ve never been quite convinced that there was a big problem with the buy-to-let market itself, so much as with a significant proportion of the new wave of BTL landlords who have done it wrong and will lose/have lost money as a result. Over time, the problem is self-correcting. There are a lot of new landlords who only ever budgeted for profits from capital increase, so they overpaid for their properties as a result. The traditional way ruled out BTL investing at that price.

  • harrymeadows

    This looked like utter rubbish, so I did what a decent journalist would have done.

    I took the time to check the source data.

    Average HP in England in 2009:


    That’s what the Land Registry website says (the supposed source used in the Study referenced in this blog, and hilarious titled “Home Truths”). It is what you get when you sum the 9 Gvt Office Regions (excluding wales) and average for 2009.

    The Median gross pay in ASHE 2009 (the other source listed) is £25,800

    This makes the HP multiple about 6.2, NOT 10.3!!

    6.2 might be difficult to maintain, if it weren’t for low interest rates, but we have low interest rates, so it is not too difficult to maintain. And that is exactly what has happened for the last 18 months+. Mervyn King has come out and said that he does not expect a sharp rise in interest rates for a long time.

    IF the HP calamity that everyone was predicting was going to happen, it would need a big change of circumstances. What we have now is stable (we have even seen HPs rising this year).

    I feel sorry for the people wishing for HP falls that read drech like the above blog and gain solace from it.

    20 mins of independent research showed that it contained nothing like facts at all.

    Please, feel free to check my numbers yourself ….

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