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Characteristics Of The Current Housing Boom - Published 2001

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The new edition of the annual Housing finance review shows that the current housing market boom is not simply a repeat of the last boom and bust. Together with its usual analysis of significant housing market changes and policy developments across the UK, this year's Review also has an international theme. It includes an analysis of the management of housing market inflation in European countries following European Monetary Union (EMU).

  • Despite UK house prices rising by 60 per cent between 1995-2000, mortgage repayment-to-income ratios for first-time buyers have remained stable, even in London. This is partly due to much lower interest rates, which also mean that house-price-to-earnings ratios can be a misleading indicator.
  • Repayment-to-income ratios have also remained stable because rising mortgage costs have excluded households with lower incomes and without savings from buying. In part this reflects the relatively prudent approach of mortgage lenders, who clearly remain mindful of the costs to the industry of the last boom and bust cycle.
  • Net equity withdrawal by home-owners in 2000 rose slightly to £11.4 billion, accounting for 1.93 per cent of consumer spending in the year, well below the 1988 peak of 6.98 per cent in the last housing market cycle. The rise in net equity withdrawal during the current housing market boom has been dampened by sharp increases in first-time buyers' deposits.


The different characteristics of the current upswing in the housing market cycle and the boom and bust of the late 1980s and early 1990s can be seen in the movements in the key housing market and income trends for London over the last thirty years (Figure 1). In particular, this shows that in the late 1980s affordability worsened, partly because of the upswing in house prices but far more fundamentally because of the steep increase in mortgage repayment costs, as interest rates were sharply raised to tackle inflation.

The recent increase in house prices has been offset by lower interest rates, leading to a more moderate rise in repayment costs. First-time buyers' incomes lagged behind the growth in average earnings during the housing market downswing in the mid-1990s, but have now risen above the trend to a similar extent as that experienced a decade earlier (Figure 1).


Hence this time round the central 'affordability crisis' in London is about those households unable to afford access to the market, rather than about those that purchased in an upswing only to see a sharp rise in interest rates. Another key feature of the current difficulties in gaining access to the market is the sharp rise in the level of first-time buyer deposits over the last five years. The average first-time buyer deposit in 2000 was over £15,000 for the UK as a whole, compared with less than £5,000 in 1996: at just over 20 per cent of house prices, this is the highest level for two decades. In London, the average deposit in 2000 was almost £28,000. This underlies the current concerns about the inability of key workers to obtain housing in London and other high price localities.

Current rising house prices therefore do not seem to be due to imprudent lending. Indeed, the modest rises in the levels of mortgage advances and repayments relative to incomes, and the rise in levels of deposits, suggest that lenders have remained very mindful of the lessons from a decade ago.


The impact of interest rates

In early 2001 house prices continued to rise, but mounting concerns about worldwide economic slow-down led the Bank of England to reduce the base rate to 5 per cent. As a result, interest rates for mortgages have fallen to their lowest level for more than thirty years.

While the economic slow-down should see house price increases ease back to sustainable levels, the fall in interest rates is likely to prevent any immediate falls in house price rises in 2001. However, if record low levels of interest rates are, in the short term, a boon to would-be first-time buyers they are also a potential danger in the years ahead.

Economic recovery would almost certainly bring higher interest rates, with higher repayment costs for households that bought while interest rates were at historic low levels. The potential for such a delayed affordability crisis for first-time buyers is all the greater with low inflation, as mortgage costs are only very gradually eroded as a proportion of household incomes over the lifetime of a mortgage.

Conversely, home-buying households have a far less effective safety net for a continued or worsening economic situation than was the case a decade ago. The proportion of households taking out mortgages after October 1995 has grown progressively. These households are potentially excluded from any Income Support (or Job Seekers' Allowance) help with their mortgages for nine months after qualifying for the basic welfare benefit. At the same time, figures from the Council of Mortgage Lenders suggest only a modest rise in the numbers of households taking out private mortgage policy protection insurance. Thus, while in 2000 mortgage arrears and possessions fell to their lowest levels for more than a decade, the potential for a damaging resurgence remains.

From 2001.

Edited by interestrateripoff

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Do they actually bother to read their own scribblings?

Rates are lower this time therefore mortgages affordable therefore no bubble?

Er, isn't that exactly what caused the 80s bubble? Rates fell from 17% in 1979 to 7.4% in 1988.

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