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Bootle: House Price Affordability Misleading

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Roger Bootle: House price affordability misleading

By Nicholas Paler | 09:01:16 | 01 July 2009

A stark warning on the future for the UK housing market was delivered yesterday by respected economist Roger Bootle.

Bootle, managing director of macroeconomic research consultancy Capital Economics, said while moves by the Bank of England to bring down interest rates to their lowest ever level had helped more people to be able to afford their mortgages, if rates rose to long-term average levels of around 6-7% it would make mortgages very expensive once more, even after recent falls in property prices.

He said: 'Houses would still look expensive if rates hit average levels of around 6-7%, and the average house price to earnings ratio is now still at it's previous all time peak seen in the 1980's even after recent falls, so house prices have some way further to fall.'

Bootle's comments echoed those of Nationwide's chief economist, Martin Gahbauer, who warned there were many factors which could prevent a meaningful recovery.

While noting house prices had risen in three of the last four months, he said there were many headwinds facing prices, including an increase in supply levels which are at abnormally low levels, as well as an increase in interest rates.

He said: 'With interest rates currently at unusually low levels, initial affordability may therefore be painting a somewhat misleading picture of the true position.'

Gahbauer also pointed to the house price to earnings ratio – which does not depend on the current level of mortgage rates – which he said was still some way above its long-run average.

'The recovery in housing demand could therefore easily stall if and when interest rates begin to rise again,' he said, pointing out mortgage rates are already on the way up.

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