I read an article on Write About Property yesterday, which showed how past house price corrections have come at a time when first time buyers had been priced out of the market, and lasted until first time buyers could comfortably afford to buy houses again. The figure the article mentioned was a further 15%, which would bring average mortgage repayments down to about half the average salary of a first time buyer.
The article was based on a fairly loose prediction of what the current nationwide affordability index (the index of average mortgage repayments as a percentage of average first time buyer salaries) would stand at, because the Q1 2009 figures have not yet been released.
But if we apply the same methods to the House Price vs Earnings ratio (HPER), that is to track how the rise and falls of the last crash measured on the HPER ratio, which does have up to date figures, it paints an even worse picture.
The last house price correction began when, and in my opinion (and Write About Property's) began because gross house prices were pricing first time buyers out of the market; in Q4 1989 when the average gross house price was 3.7 times the average salary of first time buyers.
Major price falls ended in Q3 1993 when the average house price had come down to 2.3 times the average first time buyer's salary. Prices then bounced around the bottom until Q2 1996.
The house prices started growing again, and the HPER index reached had reached 2.5x when there was a growth slowdown which kept it below 2.7 until Q3 1999 when growth began to accelerate. From then on (barring a couple of minor growth slowdowns) the HPER index grew by at least .1x almost every quarter. By Q4 2007 the average gross price of a house was 5.4 times the salary of average first time buyers, and shock horror, growth began to slow before spiralling into the plummet we are still dealing with.
Irrelevant of why prices were allowed to grow to such ridiculous levels, I believe it was because of the investment boom, but whatever the reason if the last crash is an indicator for this one, which I believe it is, house prices will fall until they are no more than 2.3 times an average first time buyers salary.
According to Nationwide the average house price has fallen by approximately 15% between Q4 2007 and Q1 2009. The HPER index has come down to 4.1x. Going by that, if a 15% drop takes only one multiplication off the HPER index, then we need another 30% drop.
I don't actually believe prices will drop another 30%, because the HPER index fails to factor couples buying together, interest rates and many other factors, but between the Write About Property article, and this one, I think there is room for us all to be sceptical about the next green shoots report -- until houses are more affordable to average first time buyers anyway.
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