Greengates Builders Merchants

Are house prices too high?

Data from Lloyds-owned Halifax, Britain's biggest mortgage lender, shows average UK house prices are 4.89 times greater than the typical wage, up from 4.54 a year earlier. This compares to an average of 4.11 since 1983. The low was 3.09 at the end of 1995.

Nationwide, Britain's largest building society, publishes slightly different data, based only on first-time buyers. It suggests the prices to wages ratio is 4.9, up from 4.4 a year earlier. The peak was 5.4 in late 2007 and the low was 2.1 in 1995.

Nationwide has also measured affor­dability for first-time buyers based on the proportion of income spent on mortgage repayments. This is 33.2pc and has barely moved in recent years despite soaring house prices. This is because mortgage rates have been falling, driven lower by the Government's Funding for Lending Scheme.

The highs on this measure were 53.5pc in 1990 and 51.8pc in late 2007. The low was 17.5pc in late 1995 and early 1996.

In the ten years up  to the start of the financial crisis, house prices tripled. Many people think this is because there were not enough houses around, but that is only part of the picture. A major cause of the rise was that banks have the ability to create money every time they make a loan. During the period in question the amount of money banks created through mortgage lending more than quadrupled! This lending was a major driver of the massive increase in house prices.

House prices rise much faster than wages, which means that houses become less and less affordable. Anyone who didn’t already own a house before the bubble started growing ends up giving up more and more of their salary simply to pay for a place to live. And it’s not just house buyers who are affected: pretty soon rents go up too, including in social housing. 

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