Calculating the Past to Determine the Future of UK House Prices

UK 03 October 2009 - Regular readers on the site will know I wrote several articles earlier this year that analysed the dynamics of UK house prices and affordability since 1957, including a detailed look at the last housing crash, to try and forecast how much farther prices are likely to fall this time.

I used the Nationwide affordability index, which shows the percentage of first time buyers salaries that are being used on mortgage repayments, to show how affordability has a direct affect on house prices. However, I was left hamstrung by the fact that Nationwide's affordability index stopped in the fourth quarter of 2008. So I had to try and forecast for the past before I could forecast for the future.

Read the articles by clicking the links below (perhaps bookmark this, them or both for future reading):

UK House Prices: Learning the Correction Lesson

(Long and Drawn out.

Land Registry UK House Price Decline Slows - Prolonging the Agony(The theory explained more concisely)

More on the Cause of the UK House Price Correction: Lack of Affordability(A different way of looking at it, and my wait for Nationwide to publish up to date affordability figures).

Well, they have finally published the figures for, not only Q1 but Q2 as well. I have been checking regularly, and they must have added both when they added the Q3 house price index. Never mind; now that I have it I can add the figures into my calculation to see how much farther prices have to fall before this correction will end.

As I have linked to the previous articles above, I will simply put the opinion they carried here: Once houses become so expensive that the average mortgage repayment is over 110% of a first time buyers salary, a severe correction becomes necessary. These corrections do not just take us back to the long-term average of about 90%, they take house prices down until mortgage repayments are within 60% of first time buyers salaries.

The Nationwide affordability index shows that the percentage of first time buyer's salaries being spent on mortgage repayments dropped from 105.9% in Q4 2008, to 91.6% in Q1 2009, during which time house prices fell £7,119.00. Unfortunately prices began increasing then, and an increase of £4,357.00 on house prices put the affordability index back up to 93.6% in Q2.

Using the lowest of those two measures: the affordability index decreases by 1% (first time buyers spend 1% less covering their mortgage) for approximately every £2,000.00 that house prices fall. Based on that: for the affordability index to come down the 33% to 60% house prices have to fall a further £66,000 (approx. 40%).

Using the biggest of those measures: the affordability index decreases by 2% for every £1,000 that prices fall. Based on that: further house price falls of £16,500 (approx. 9.7%) would bring the affordability index down to 60%.

As we are using just 2 different figures, the average is the sum of the 2 divided by 2, which is £41,250. I am going to make that my definitive forecast on the UK housing market; that house prices must fall a further 25% from their current level before the correction will end.

You can download all the indexes used to in this article here.

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