The market has been boosted by low interest rates and higher earnings. However, indicators suggest affordability is now stretched and there is little scope for further significant house price rises, according to an article by CML Senior Economist Jennet Vass in the latest issue of the CML's journal, Housing Finance.
A number of factors that would suggest affordability has begun to constrain the housing market are highlighted.
* House price growth rates are showing signs of moderating - both Nationwide and Halifax house price indices have shown slower growth over the last few months.
* Transaction levels have fallen to 300,000 in the second quarter of 2003 from an average of 370,000 over the last six years.
* First-time buyers usually make up well over 40% of the market, but over the last year this proportion has fallen to nearer 30%.
* Although mortgages remain cheaper than rents on comparable property, the price differential is narrowing.
Interestingly, over the last year the earnings of first-time buyers have risen by more than overall average earnings in the UK. This suggests that the buyers who are able to get on the property ladder have higher earnings potential and that other first-time buyers are being priced out of the market.
In addition, the proportion of borrowers with a low loan-to-value ratio (under 75%) has increased. Usually loan-to-values increase as house prices rise because it is harder to save a deposit of a proportionate size. During the 1980s' housing boom around 30% of first-time buyers were taking out 100% mortgages. This is not so common now - only 8% of first-time buyers took out 100% loans this year. This could be happening because the buyers who are able to enter the market are at the upper end of the earnings scale and have been able to save a significant deposit. Anecdotal evidence also suggests that parents are releasing equity from their own properties for their children.
The article concludes:
"It is clear that the housing market has been given a huge boost from lower interest rates and higher earnings. However, the benefits to affordability have now all but been spent and there is little scope for further significant house price rises - despite the gloomy warnings of an imminent crash, the housing market appears to have begun a process of naturally correcting itself. While it is too early to be confident of a gentle slowdown, there are tentative signs that this is happening."
