The Royal Institution of Chartered Surveyors said this week that potential house buyers were being deterred from entering the market by rising interest rates and the fear of a crash. This news is hardly surprising. First time properties now cost, on average, more than six times the average salary. That is high by historical standards. In my opinion, the prognosis for the housing market is not good.
Over the summer, senior Bank of England figures warned that house prices are too high. The emphasis is on the word are. They are not just rising too fast, but are too high. This is why I think a sharp fall is likely. It is true that certain conditions now are different from previous house price bubbles- such as low (but rising) interest rates and full employment. Even taking these into account, I think prices are way too high. Historically there has been a stable relation between house prices and wages. That stable relationship has now broken down.
A number of people I have spoken to, who were perspicacious enough to join the market in the mid-90s, tell me that they would not be able to afford their own (modest) houses based on current prices. The vitality of the housing market depends on a healthy supply of first time buyers. These are declining as a proportion of the total number of people in the housing game.
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