Housing Market and Ratio of House Prices to Income Ratio.

Readers Comment: Additionally, there is also the average household income to mortgage cost ratio rather than against house price to consider. This is not nearly as dramatic as the ratio of income vs prices because mortgage costs are so much more affordable these days as interest rates are lower and the available mortgage terms are longer.

I agree. People look at house price to incomes ratios and say house prices need to fall 33-50%. But, when buying a house people don’t give that much importance to the house price to income ratio. The most pressing issue is - Can we afford the mortgage repayments? see: Interest payments as a % of income

The affordability of housing is very much different when average long term interest rates are 10% compared to current interest rate levels of 5%.

The main reason for the last housing crash in the UK was that interest rates were more than double current levels. This is what made mortgages unaffordable and caused a crash in demand; this led to 4 years of falling house prices or stagnant house prices. At the moment, the main problem is that the bank won’t lend people a mortgage.

If UK interest rates were to increase to 1990-92 levels, the housing market really would be in serious risk of collapsing; people like me couldn’t afford to maintain their variable mortgage payment. However, I think these interest rates are unlikely to occur. True, we are worried about cost push inflation - rising oil prices and rising food; but, these days we get excited when inflation rises to 3%. Inflation in double figures is a long way off.

Conclusion.

The UK will see falling house prices in the short term, because of the difficulty in getting mortgages combined with a lack of basic affordability.. The drop in mortgage lending has been quite dramatic. However, if the mortgage market recovers its basic levels of liquidity I expect to say a moderate recovery. In the long term UK house prices could still rise. see: long run prospects for UK house prices

However, in US, house prices will take much longer to recover, because in addition to the falling demand, they have a surplus of supply which the UK does not currently have.