RLA : RPI : Earnings link points to house price fall

News from the Residential Property Investor, the bi-monthly magazine for RLA members

other artilces from the June / July 2001 issue

Earnings link points to house price fall - June / July 2001

House prices in parts of Britain are outstripping earnings by so much that the market is almost certain to fall.

This gloomy prediction came from economics intelligence firm Cambridge Econometrics.

Having tracked the relationship between house prices and household income between 1974 and 2000, it found evidence for 'an apparently gently falling long-run ratio of about three to one'. This it described as a 'crude but effective' measure of affordability whose accuracy was borne out by the way house prices fell back into line following the housing boom at the end of the 1980s.

Currently the ratio has got out of line again, suggesting that UK average house prices could be set to fall. However, the position is not uniform.

House prices in London and the south east are most at risk there should be an average fall of £31,000 in London and £11,000 in the rest of the south east to bring the relationship between prices and income back into line, said Cambridge. But on the other hand increases are needed in Yorkshire and Humberside, Wales, Scotland and the East Midlands.

Last May Cambridge predicted average house price rises of 12 per cent across the country, falling back to 5 per cent in 2001. It still believes the house market has peaked and that prices, especially in the south ease are set to fall back.

One reason is that although interest rates are low, taken in conjunction with a low rate of inflation they represent a real cost of 5 per cent, which is 'historically above average'.

Because the house market is slow to react - prople simply put off moving if they cannot get the price they are asking falls in prices are usually preceded by falling sale volumes.

'This seems to be what is happening in the south of England currently and the evidence points to continuing low volumes of transactions in the next year. The housing market is highly seasonal with most transactions being completed in the second and third quarters of the year, but the latest evidence points to the demand for housing slowing systematically and rapidly in the last three quarters, most noticeably in London, the south east, the south west and East Anglia where transactions in the last three quarters are now nearly a third below the same level a year ago'.

There is, however, no sign yet of prices falling back. Figures from the Halifax last month pointed to increases still running 7.3 per cent up on last year, with a 1.5 per cent increase in May alone. 'Prospects for the housing market remain positive with prices set to continue their climb over the remainder of the year', said the mortgage bank.

other artilces from the June / July 2001 issue