Current property market

Having just watched a program about the current property market and the comments about affordability that not only this program mentioned but that is also all over the press at the moment I thought I would share my comments on this.

All we are hearing about in the media is about the current house price to earnings ratio in regard to affordability which I have heard as being 1:9 and in 1990 around the time of the property crash this was around 1:5. This is being reported in a way that suggests we are now in for a property crash and that the current market is not sustainable etc etc. Whilst I feel that prices may be heading for a downturn or at least a levelling off my opinion is that a big part of the reason is the lack of confidence in the market that the media is fueling. I see the way they are reporting the figures as being mis-representative as they are not taking in to account the current interest rates.

Surely the way to calculate affordability is by looking at the amount of your monthly outgoings. The ratio of house prices to earnings is by itself largely irrelevant. What really matters is how much the mortgage is actually going to cost you. Although we have had recent rises in interest rates this has come after a period of all time lows. During the property “crash” of the late 80’s, early 90’s interest rates were in the region of 14% which meant the cost of borrowing was a lot higher than it is today.

The following graph shows the percentage of income that is spent on mortgage payments for first time buyers since 1980.

First Time Buyer Affordability Graph

We can see that interest rates were 15% in 1980 as well as 1989-1990 around the time of the crash. Average property prices went up over 40% between 87 and 89. It was the fact that interest rates were high combined with the rise in property prices that caused the percentage of income spent on the mortgage to be so much higher than previously. This is a true picture of affordability and it is not surprising that people not being able to afford their mortgage payments results in large numbers of repossessions, a lack of confidence and a downturn in prices.

The following graph shows the percentage of income spent on interest payments on credit cards, unsecured borrowing and mortgage payments for all households with a mortgage since 1990.

Interest Burden Graph

Again we can see that in 1990 the amount of income that was taken up by mortgage payments was at a much higher percentage than it has been recently. If you follow the trend from around 1994 you can see that the affordability level is around where it should be expected.

Going back to the first time buyer graph, if you take a trend line from a period of 1980-1989 the mortgage payments were running steadily at around 25% of income. If you take a new trend line from around 1993-2004 the percentage is around 19% and only now are we getting back up to around 25%. The reason that mortgage payments seem high at the moment is simply that we have had it so good for the last few years. If you look at the peak around 1990 you will see that the percentage topped 35% before triggering the “crash”.

Taking all this in to account my opinion is that the market is running at a “true affordability ratio” in line with what was historically considered to be acceptable. I am therefore confident that current house prices and interest rates do not warrant a “crash” and that one of the biggest threats to property prices is currently the media.

To finish with a thought – if you had owned a property before the ’89/’90 crash and was able to ride out the storm and still owned that property today, how much money would you have made?

– Eekins

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