Crash II

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It’s nearly a year since my previous look at house prices, and today’s Bank of England interest rate cut makes it timely.

I’m just going to give the summary figures, updated with a year’s worth of statistics. My sources are the Nationwide seasonally adjusted representational house price series, the National Statistics seasonally adjusted average earnings index, the National Statistics series of median household income taken from “Effects of taxes and benefits on household income” and the Bank of England monthly average of the official base rate. The annual earnings index is published three months in arears, so at the moment there are only figures up to August 2008. For the purpose of these figures, I’ve assumed no earnings growth since then. Since I can only find median household income values for 1997–2005, I’ve projected these values forwards and backwards by the annual earnings index (there are problems with doing this, notably variation in household size, which I cover in my previous post; as before, if you know of a better source for this statistic, I’d love to hear from you).

The first figure attempts to suggest where the bottom of the current crash might be by comparison with the bottom of the last crash. This shows the Nationwide representational house price (red line, left scale), the Bank of England base rate (blue line, right scale), and the representational house price as of June 1994 (which is the bottom of the last crash by this measure), scaled forward by the average earnings index and the inverse of the base rate plus 1.5%. This is a pretty crude measure of affordability, but it approximates the repayments on an interest-only loan.

Representational house price (red line) compared to the bottom of the crash in 1996-01, scaled forward by average earnings and Bank of England base rate (green line).

The second figure shows two further measures of affordability, the representational house price divided by the median household income (red line, left scale), and the payments on an interest-only loan for the representational price at the Bank of England official bank rate plus 1.5%, divided by the median household income (green line, right scale).

Representational house price divided by the median household income (red line), and the payments on an interest-only loan for the representational price at the Bank of England official bank rate plus 1.5%, divided by the median household income (green line).

These figures have to be taken with a big pinch of salt: few were actually taking out mortgages at 15% in 1991; whether many will be able to borrow at 4.5% in the current climate also seems rather unlikely. However, they suggest to me that prices still have some way to fall—at least another 15% or so off the top of the market—even if the Bank of England base rate remains at 3%.