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Corrections ‘will happen’ before affordability crisis

Corrections ‘will happen’ before affordability crisis

Market or regulation corrections “will happen” before the UK housing market slips into an affordability crisis, HSBC economist Chris Hare has said.

With annual house price growth in June rising at its fastest rate since June 2004, wages have struggled to keep up. As a result, the gap between how much houses cost and what people earn is continuing to widen, making it harder for younger generations to get on the property ladder.

Hare said continued house price inflation was the “order of the day” for now and predicted affordability to become a “real issue”.

“Over the near term, house price to income ratios have gone up, given drivers such as the stamp duty holiday, and ‘the race for space’, [...] which could continue to put upward pressure on house prices, and price to income ratios for a while.

“We're forecasting house price inflation somewhere between 5 and 10 per cent. But then when we're looking into next year, what we'd expect is a bit of a slowdown in house price inflation.

“House price to income ratios will start stabilising. They may even start coming down a little bit over the longer term. So, you might even see a period where house prices grow a little bit less quickly than incomes, which are growing somewhere between 3 and 4 per cent.”

Hare recalled how house price to income ratios rose sharply back in the 1990s and 2000s, but eventually levelled out.

“We've got to a point where affordability is so stretched for so many potential new buyers coming into the market that such large numbers of would-be house buyers are struggling to raise funds for a deposit.”

At some point, just like in past instances of gaping house price to income ratios, Hare said “the affordability-related laws of gravity have to kick in”. 

“This doesn’t mean the price to income ratio will fall very quickly,” he continued. “Usually, you need a recession for that to happen. But we’ll at least see some stabilisation, given how stretched those affordability levels have become in recent years.”

Even if house price income ratios don't correct themselves, Hare said the UK could expect policy-related corrections through the Bank of England’s Financial Policy Committee which put restrictions on loan-to-value ratios.

“Or ultimately, we might see a strong upswing in the business cycle which starts pushing interest rates higher. That would take a little bit of steam out of the housing market.”

Ideally, more houses being built would help the house price to income ratio, said Hare.

“By increasing the supply of housing, the affordability metrics would start improving. But economists have been looking and hoping for that for decades and it hasn't really happened. So that's probably not something we'd look for.”

ruby.hinchliffe@ft.com