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Carnival fun house mirror

Posted by: andrewlund

Rock bottom mortgage rates make houses prices look quite affordable right now. Someone on the median income who buys a home at the median price would spend only 12.6% of their income on mortgage repayments. That’s much less than the pre-bubble average of 20%. But the affordability is masking a problem – houses are overvalued. From 1988 to 1999 houses averaged 2.6 times income and then peaked at nearly 4 times. Now they are at 3 times. Source – Karen Weise writing in Bloomberg about the American experience.
Here in the UK, Nationwide recently reported an earnings price ratio of 4.4, down from a peak of 5.4 but still above the long run average of 3.6 with Britons spending 20% of their earnings on mortgage repayments.
US expert Stan Humphries said of their market “We are currently living in a carnival funhouse mirror. Homes seem quite affordable when at base they are not.”
Back in Blighty Nationwide said it expected the housing market to improve as growth in the wider economy picked up this year.
Maybe in comparing us with the US we are talking chalk and cheese. After all, in a crowded island like ours the scarcity of land is always going to put a floor under prices so people have no choice but to spend more of their income on housing. However, the point about the distorting effect of ultra low interest rates is one that bears thinking about.
Andrew Lund
Andrew Lund

Compliance Officer for Legal Practice

Andrew oversees the Firm’s Quality Systems and is committed to making sure that our client’s receive the very best customer care and attention along with the best marketing and legal advice in the area.

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