Graph showing Ratio of House prices to Incomes
This graph shows an interesting increase in the ratio of house prices to income. It is well know that UK house prices have increased significantly since 1993. In some areas the house price increase has been at least 300%, since the early 1990s. However, since 1998, house prices have been increasing at a much faster rate than incomes, meaning that the ratio of house prices to average disposable income is reaching an all time high of 6.
Note disposable income means the income after taxes have been paid.
Why House Prices are Set to Fall
- The effect of this is that house prices are increasingly unaffordable for many first time buyers. People are simply being priced out of the market and so demand is likely to fall. Other reasons why prices may fall.
- Global credit crunch will make mortgage finance more difficult and expensive in the future.
- Slowdown in global economy may spread to UK.
- House prices are overpriced so investors (speculators) will increasingly sell.
- Interest rates increased in the past 18months, meaning many on fixed rate mortgages will soon have to pay higher payments.
Therefore, there is a strong case to suggest house prices will fall, and this is backed up by recent data showing a slowdown in mortgage lending and falls in monthly house prices.
How Much Will House Prices fall by?
Some predict a collapse in house prices, but, I think that is unlikley at the moment because:
- It is different to 1992, interest rates are much lower, and could fall this year.
- Supply constraints are still there to keep prices high.
- There is no evidence of a big increase in house repossession at the moment. If interest rates fall, it may ease the situation as well
Nevertheless a moderate fall is quite likely.