I have been pretty cautious about a return to house price growth for some time. You can find the latest GSPC forecast here.
But a conversation with a senior manager in a housing association prompted me to take another look at the assumption that prices are unlikely to change much for some time.
The question that prompted the re-think was ‘Why do people spend so much money on buying their home?’ In other words, ‘why go for the biggest mortgage you can get when buying a home? Why not go for something cheaper and borrow less?’
As it happens, Scots really are more cautious than others about how much we spend on buying a home. House prices here are significantly lower relative to earnings than the UK average (see graph). Moreover, static incomes and a steady rise in the cost of living means that we don’t appear to have the financial firepower to push prices higher.
But perhaps that analysis is missing something vital – the human element. Part of the answer to that housing association manager was that your home has a huge influence on your quality of life. We want to live in the best house and the best location we can afford because it has such a direct effect on our standard of living. After all, why live in a smaller, more crowded house if you could afford somewhere better?
So, could we afford somewhere better? Probably yes if we wanted to.
At the moment, the average house price in Scotland is 3.3 times average incomes according to the Halifax. That is some way below the average over the last 30 years of 3.5 times income and a long way below the peak in 2007 which reached 4.8 times income.
On that basis, a small rise in prices would be no more than a return to the long term average.
Now take a look at average mortgage payments as a proportion of disposable earnings. Today, mortgage payments consume less of our cash than at any time in the last 30 years. Just 19% of our post tax income goes in mortgage payments compared to an average of 29% (see graph right).
Of course, that is largely down to ultra low interest rates and payments will rise as interest rates do. But the Bank of England made it clear yesterday that rates will remain very low for some time and that any increase in rates will be very gradual. You can read the Governor’s comments here. But the key part reads: “The level of interest rates necessary to sustain low unemployment and price stability will be materially lower than before the crisis”.
In other words, mortgage repayments are likely to remain affordable compared to their historical average for a long time – probably many years.
Both of those would suggest that there is some room for prices to rise, even without an increase in real incomes. The question is; will we – as homeowners and buyers – go down that route? Or has recent experience in the recession fundamentally changed our appetite for risk? On the answer to that question depends the likely movement in house prices over the next few years.