The law of averages

Winter 2004

Sometimes it seems as if we are a nation obsessed with house prices. Barely a day goes by without there being an item in the newspapers about house prices – are they going up or down? Is the market too volatile, or perhaps too stagnant? What is happening to interest rates?

But we are in danger of knowing the price of everything and the value of nothing. There is a bigger picture to be considered; the sustainability of house price growth, of course, but also the dangers inherent in a constantly rising market.

The most recent Oxfordshire Economic Profile, which can be viewed on the council’s website, had what seems like good news for anyone who has bought a house in the last few years. The average house price in Oxfordshire has almost doubled since 1999, according to the report. Prices rose by 96 per cent to £238,088 for the period April to June 2004. (The Land Registry published its figures for the period July to September after we went to press.)

However, this is less than good news for first-time buyers. The figure quoted above for the average house is around seven-and-a-half times the average wage in the county. But, according to new figures from the Joseph Rowntree Foundation, less than a quarter of loans advanced to households are for an amount that is more than 3.25 times the combined household income, while loans to individuals rarely exceed 4.1 times their annual income. This means a dire situation for anyone struggling to get on the property ladder.

One source of hope for first-time buyers, of course, is that not every property fetches the average price. The average flat or maisonette in Oxfordshire, according to the most recent Land Registry figures, costs £155,810 (up from £146,344 last year) and it is possible to find small properties, especially those in need of renovation, that cost less than this.

However, many homes which would be affordable for first-time buyers are snapped up by buy-to-let investors. Left with no choice but to rent, many would-be first-time buyers end up covering the mortgages of buy-to-let landlords in their rent payments, and drifting further away from affording their own place.

Sam Warren at The Mortgage Advice Bureau explains the problem:

Lenders like to see rental income of 130 per cent of the interest due. Taking an average buy-to-let mortgage of £100,000, at current rates, that will be an approximate monthly payment of £500, yielding a monthly rental charge of £650. Not many hopeful first-time buyers can pay £650 a month in rent and still save for the deposit on their own home.

But why should this concern anyone who already has their own property? The answer is that housing problems affect us all. The average house price in Oxfordshire is seven-and-a-half times the wage of a firefighter, and around nine times the pay of an experienced nurse, according to the Oxfordshire Economic Profile. So how on earth do we expect to keep key workers in the county? Government funding comes in the form of the Key Worker Living programme, but Oxfordshire hospitals and schools still have problems with recruitment and retention of staff.

Another worry about the lack of first-time buyers is that they are needed to sustain the lower end of the housing market, and that a continued absence of first-time buyers will cause prices to crash. However, most experts predict a soft landing for the housing market. The latest Hometrack survey shows that house prices have fallen “practically everywhere”. While the number of agreed sales fell by one per cent in October, this was less than September’s 5.4 per cent fall, which means that while the number of sales agreed is decreasing, it is at a slower rate than previously.

John Wriglesworth, Hometrack’s housing economist, comments:

The key reason for the stagnating house price environment is that house prices have finally reached their peak in the current cycle. However, we see no sudden or significant prospective downturn. Much lower interest rates compared with ten years ago, strong rises in household incomes, lower unemployment and lenders now willing to offer large mortgages relative to incomes all point to a levelling out of house prices.

Whoever said “Money is a consensus hallucination” was right – up to a point. Estimated house prices mean nothing unless someone is willing to pay hard cash for a property, and there is evidence to show that soaring house prices give people a false sense of wealth, adding to this country’s borrowing mountain. The gentle slowing of house price growth we are currently experiencing is good news for the health of the market throughout the county.