The signs that tell us the house price bubble won’t burst

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Wage growth has consistently failed to keep pace with soaring house prices in recent years, sending affordability to a record low.

Buyers now need 7.7 times their income to afford the average home, according to analysts Capital Economics. This has surpassed the previous peak of 7.5 needed before the financial crisis.

The affordability problem has so far been masked by record-low mortgage rates and savings bolstered throughout the pandemic, although rampant inflation and a higher cost of living threaten to pull these safety nets from beneath borrowers.

Aneisha Beveridge of Hamptons said: “The increase in the cost of living has been harsher and more persistent than expected, which may result in faster and higher interest rate rises than first anticipated.

“This could slow the market and is particularly likely to weigh on first-time buyers, whose incomes are being squeezed by soaring inflation.”

Mortgage rates have steadily climbed since October last year and borrowers are already paying hundreds of pounds more in interest each year as a result.

However, interest rates are still low by historical standards and are expected to cushion house prices from a sharp fall.

Andrew Burrell of Capital Economics said: “Even if the Bank of England increases interest rates to 2pc next year, as we forecast, mortgage payments would still be much more affordable than in 1989 or 2007 [the previous property market crashes].

“We do not anticipate house prices collapsing under their own weight.”

Capital Economics has predicted strong house price growth to continue until the summer. But by the second half of this year, higher mortgage rates and inflationary drag will have dampened buyer demand and slowed house price growth “to a crawl”.

“Only if house prices continue to rise sharply despite higher mortgage costs, or if Bank Rate rises further than we anticipate, would they be due a fall,” Mr Burrell said.

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