House price to earnings ratio
For UK house buyers the average house price is 4.4 times average earnings . This peaked in 2007 to over 5.5 times and fell to its lowest point in the last ten years in 2008/2009 at about 4 times. This has remained fairly steady for the last few years, but in my opinion is still too high.
When you look at Mortgage payments as a percentage of income, we see that again this peaked at over 50% of income in 2007 when interest rates were around the 7% mark.
As interest rates have dropped of course so has the percentage. it now stands at around 35%. Both these indicators in my opinion are too high to sustain continued growth of the property market. The Nationwide produces an affordability index with the mean being 100. Currently the index stands at around 85 in terms of affordability.
Of course the bank base rate has been at an historical low of 0.5% since 2009, unfortunately fixed and variable rates offered by lenders haven’t fallen so fast and the gap between the two has never been greater. Of course this has a knock on effect on the percentage of income required to service the mortgage and affordability.
Prior to 2007/2008, the gap between the bank base rate and lending rates was around 2%, when the credit crunch hit, the gap widened to around 4% and this is where it is today. This means that mortgage holders haven’t benefited as much from the historical low rates.
This gap is down to a number of factors
1. There was a massive shortage of liquidity and the banks desparately needed to improve their balance sheets. Banks were and still are reluctant to lend. An easy way to increase profitability quickly is to make more profit on each transaction. Is there an element of collusion between the largest banks in the UK?
2. Becuase of the shortage of funds available, banks were easily able to toughen up lending policy, requiring larger deposits and lower income multiples. Of course the lucky borrowers had no choice but to pay the higher rates of interest.