HOUSE prices remain overvalued in Britain, locking out many aspiring buyers. Of that there is no doubt. But it is also the case that average prices have fallen far more than is usually understood; the single biggest reason why so many younger people cannot enter the market is because they have to put down much larger deposits and cannot borrow as much relative to their incomes. Given the prospect of further house price declines, these frustrated wannabe buyers may actually end up thanking their lucky stars.
The UK housing market peaked four years ago, with the average property going for a record £199,612 in August 2007, before tumbling all the way down to £154,663 by April 2009, according to the Halifax. The average price is now £163,981, and has been fluctuating around that level for the past 11 months. In cash terms, the average UK house is back to where it was in June 2005 – the gains of the last six years have been entirely wiped away. In real terms, we are probably back to early 2003 levels; this further demolishes the case for a wealth tax. The extent of the slump is rarely discussed – the continuing rise of prime central London property prices, fuelled by overseas demand and a ridiculous scarcity of family homes, has obscured the overall picture.
Compared with the all-time peak of four years ago, in cash terms, the average house price is down by 17.9 per cent, a devastating reduction. During that time, the retail price index has risen by a crippling 13.5 per cent – so in real terms, the price of the average home in the UK has collapsed by around a third. Prices are down in London too, on average, which busts another myth: they peaked at around £319,000 in the third quarter of 2007 and are now at £262,000.
Of course, the real loss to homeowners is even greater: billions are poured into the housing stock every year to refurbish, extend or modernise properties. Transactions are expensive; stamp duty raises a fortune and is a weird and unfair tax. Against that, the real value of mortgages is being eroded; homeowners with the largest mortgages are losing the least from the crash. Mortgage debt is a partial hedge against inflation. Interest bills are also down, often substantially.
Further house price falls are on the way, at least in real terms. The average house peaked at a preposterous 5.82 times full-time male earnings in April 2007. It is now at 4.45 times, still too high; the ratio won’t fall all the way back to the 3.1 seen in 2000, however, because the population is growing so fast and because restrictive planning rules are still scandalously constraining the supply of new homes. But the market will take another hit when the Bank of England eventually starts to increase rates, which will shock those who have become used to permanently rock-bottom rates.
Given that prices are bound to drop further, lenders will continue to insist on large deposits to protect themselves in case borrowers default – and of course it is these down-payments, combined with smaller loan to value ratios, which have put home-ownership out of reach for millions of people who could actually afford mortgage payments at current rates. But while having to pay exorbitant rents isn’t fun, the younger generation could yet have the last laugh: on current trends, they could end up paying significantly less for their first home when they finally manage to cobble a deposit together.
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