House prices 'rise to 6.1 times average earnings'
05-30-2016
PA Money News
House prices have surged to more than six times average earnings, driven by record low interest rates, but are on course for a correction once rates begin rising, an economic forecaster has warned.
House prices have surged to more than six times average earnings, driven by record low interest rates, …
House prices have surged to more than six times average earnings, driven by record low interest rates, but are on course for a correction once rates begin rising, an economic forecaster has warned.
Fathom Consulting said the UK's house price to income ratio is now at 6.1 times earnings, "within a whisker" of its pre-recessionary peak of 6.4 times and well above the long-term average.
It said house prices would need to plummet by up to 40% to fall in line with average earnings, or household incomes would have to grow at 10 times their current pace for the next five years to fall into line with the pre-2000 average of 3.5 times earnings.
The body added that Chancellor George Osborne's Help to Buy scheme introduced in the 2013 Budget, which provides loans and guarantees mortgages, also proved a "game changer", helping demand for houses soar.
It said that interest rates at 0.5%, where they have remained since March 2009, have kept mortgage repayments lower and stoked housing demand.
Fathom said: "This increase is demand driven, brought about by both exceptionally low real rates of interest and Chancellor Osborne's Help to Buy scheme."
It added that "the fragile arithmetic" of low rates and easier mortgage access means the Bank of England will put off a rate hike until at least early 2018, rather than risk destabilising the housing market.
But the think-tank said this will only postpone an inevitable fall in house prices.
Fathom said: "Real mortgage rates will not remain as low as they are today, and when they do rise, the fragile arithmetic supporting the elevated house price to income ratio will unravel.
"All the while, 'lower for longer' rates of interest are inflating the housing bubble and worsening the inevitable correction."
The body added that if the UK were to leave the European Union after a Brexit vote on June 23 it would lead to a "toxic combination" of weaker economic growth and higher inflation.
Last week Mr Osborne said house prices could take an 18% hit over the next two years and there would be an "economic shock" that will increase the cost of mortgages if the UK votes to leave the EU.
However, Vote Leave campaigners dismissed this as an extraordinary claim by the Chancellor.