Wimpey (George) - The UKs Leading Housebuilder

UK housing market - LEX COLUMN.
31 December 2005
Financial Times

Crisis, what crisis? Fears of a collapse in the UK housing market in 2005 now seem overdone. Nevertheless, there seems little prospect of a return to the runaway prices that made the housing market a boring staple of the last decade's dinner parties.

Annual house price inflation is running at the lowest rate since June 1996, according to the Financial Times's own index. Prices have been broadly stable for the past three months and are now rising more slowly than the rate of inflation and well below the rate of average earnings growth. Instead of a crash, the market seems to have stabilised close to February's high level.

The bulls continue to take comfort from the fact that some measures of affordability remain below their long-run averages. Mortgage interest payments, for example, are still only 8.9 per cent of household disposable income, compared with a long-run average of 9.2 per cent. As house prices have stabilised, their ratio to average earnings has finally begun to fall. Nevertheless, house prices will have to remain stable for years if the ratio is to come down to levels that were considered normal in the past. The Royal Institute for Chartered Surveyors estimates that house prices in the third quarter were 7.8 times earnings, compared with an average of 4.9 times since 1969.

This, as well as record household indebtedness, may explain why improving levels of mortgage activity and transactions during the second half of the year have not translated into higher house prices. This stagnation alongside a recovery in transactions will please the Bank of England and the Treasury. But for ordinary mortals, the days of rampant house prices inflating away their massive mortgages are over.