Are houses actually becoming more affordable?

22 May 2014

Amid growing fears of a potential house-price bubble and following remarks by Bank of England governor Mark Carney that house construction is not keeping pace with rising demand, specialist asset manager London Central Portfolio (LCP) has claimed that affordability is actually at a 35-year high.

Earlier this month, Nationwide Building Society revealed that annual house price growth had surpassed double-digits for the first time in four years, with the average price of a home reaching £183,577 in April.

The Council for Mortgage Lenders meanwhile put that figure at just over £250,000 with annual growth reaching 13% for the first quarter of 2014.

These figures stand in sharp contrast to the relatively meagre 1.7% in wage growth - 1.3% without bonuses - for the three months to March 2014, reported by the Office for National Statistics.

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Convenient use of statistics

However, residential property investment manager LCP claims that falling unemployment paired with growth in earnings means houses are in fact at their most affordable since 1989, partly reflecting the fact that mortgage rates remain relatively low at around 3%.

But one financial adviser suspects this apparent increase in affordability is nothing more than a convenient use of statistics.

Speaking from his own experience, Ray Boulger of independent mortgage adviser John Charcol, says affordability has not markedly improved.

He says: "The premise seems to be flawed because the figures I have seen suggest that house prices are going up more quickly than earnings. It just doesn't pass the sense check."

In a television interview last weekend, Carney warned that Britain's housing market posed the biggest threat to economic recovery. Previously, the Bank has said it would consider taking action to confront the problem.

The Bank's options include raising interest rates - which it hopes to avoid - or recommending the government curtails its Help to Buy Scheme.

Catastrophic fall in property prices

Instead, LCP is calling for Mr Carney to increase the amount of capital banks are required to hold, thereby pushing up the cost of lending.

The London-focused property investor argues that raising interest rates could result in a "catastrophic fall in property prices".

It says: "The truth is, the national housing market has a habit of self-regulating when it overheats or when mortgages become more expensive and it therefore becomes unaffordable.

"A sensible move by the governor to gradually increase borrowing costs over the next few years by making loans more expensive will merely accelerate this process.

"While savers might not welcome the prospect of extended low base rates, this strategy should have the desired effect of cooling the housing market while maintaining debt affordability for businesses."

Boulger argues that although interest rates are relatively low, banks are required to use a "stress test" rate of 7 or 7.5% when deciding if customers can afford a mortgage.

He says it "sounds like [LCP is] trying to prove to potential customers that houses are affordable using fairly dodgy statistics".

This article was written for our sister website Money Observer

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