I’m going to show you two graphs that tell a story.
The first is a graph from Council of Mortgage Lenders’ figures.
Percentage of Income Needed to Pay a Mortgage
The graph shows how much of people’s income goes into their mortgage. The 2007 figure is not yet available. We can estimate it and add it to the graph because we know that the Bank of England interest rate in 2006 was 4.75 percent. It’s now 5.75 percent. That’s a real increase of 21 percent.
In 2006, 15.6 percent of incomes went into mortgage payments. In 2007, it’s 15.6 x 1.21 which gives 18.9 percent.
The second graph is from the Nationwide, showing inflation-adjusted house prices since 1975.
Inflation-adjusted House Prices since 1975
What the Graphs Tell Us.
- The graphs tell us that when the percentage of people’s incomes needed to fund a mortgage rises sharply, house prices fall. You can see there was a dramatic fall in house prices in the early 1990s when payments exceed 20 percent of income.
- With further interest rate rises expected later this year, rises that will push mortgage payments out to beyond 20 percent of income, this is not a time to expect a high return from buying property.
- The Nationwide graph shows that house prices are currently well above trend. When prices go far above or below trend, the likelyhood of a correction, pulling them back to trend, grows higher with each passing year.
Notes
There are two significant effects I’ve not accounted for in the calculation of 2007′s mortgage payments:
- People buying a house in 2007 are paying on average 10% more than they did in 2006 – because house prices are up 10%. The proportion of people buying in 2007 compared with those just sitting in existing property – who don’t have to pay more – is low. The effect of ignoring these buyers is to underestimate the proportion of income going into mortgage payments.
- I’m ignoring the fact that many people have fixed rate mortgages and won’t be paying more interest this year than last. The effect of ignoring these people is to overestimate the proportion of income going into mortgage payments – until they have to re-fix their interest rate.