Britain’s property market is about to combust because house prices are far too high and people are not earning enough to keep up.
Basically the the house price to income ratio is completely screwed up and people need to take on more debt in order to get on the housing ladder. And it is for this reason that Britain’s property market is in serious trouble, because the schism between earnings and rising house prices cannot be sustained.
In fact, there is one line in a new report, entitled “The UK’s housing bubble: ready to pop?” sent to Business Insider by macro-research firm Fathom Consulting that sums up why Britain’s housing market is set for a major crash:
Property prices would need to fall by up to 40%, or household income grow at ten times its current pace for the next five years, in order to bring the ratio back to balance.
The average house price in Britain stands at £292,000, according to the Office for National Statistics. Property prices in London are even more colossal at £552,000 on average. However, latest data from the ONS showed that wage growth slowed in the three months to February. Wages grew 1.8%, down from 2.1% in January, and far lower than the 2.3% growth expected by economists.The average Brit currently earns less than £30,000 per year.
Usually, people need to stump up a deposit of anywhere between 5% and 20% of the asking price of a property before a bank will grant you them a mortgage. So if you are not earning very much but house prices are super high, you will have to take on heaps of debt.
Just take a look at this ridiculous chart that shows how skewed the ratio has become:
Fathom Consulting blame both record low interest rates of 0.5% and the government’s various property schemes that have helped tip the supply and demand scales. That is because lower interest rates mean it is cheaper for people to service debt — so they take on more.
“We maintain our view that this increase is demand driven, brought about by both exceptionally low real rates of interest and Chancellor Osborne’s Help to Buy scheme,” said Fathom Consulting in the report.
“The housing market is likely to remain overvalued at anything other than near-zero interest rates.”
However, if interest rates do rise — and they will eventually — people could face missing debt payments and losing their homes. But according to Fathom Consulting, the Bank of England is unlikely to boost rates this year or next because it knows how a rate rise could hit households negatively.
“Fearful of destabilising the fragile arithmetic that underpins the housing market, we believe that Bank Rate normalisation is a distant prospect – regardless of the EU referendum result,” said Fathom Consulting.
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