UK House Prices have Further to Fall However You Slice It

It is a firm belief of mine that house prices will fall until houses become affordable for first time buyers. Depending on whether the economy recovers in the meantime, this will be as far as they fall, if not then they will fall further until the economy recovers.

According to the latest figures released from Halifax and Nationwide, the average house now costs about 4.5 times the average gross salary of first time buyers.

According to the lenders affordable is 4.0 times based on that being the average recorded when the housing market is in good shape. So this means house prices haven't much further to fall, right? Wrong!

It is true, when house prices keep themselves in check they hover around the 4.0 times mark, that is to say when house prices are kept a check on by any growth acceleration being followed by nominal house price growth, then the long-term average is 4.0 times.

However, what the same historic figures show, is that when this system breaks down -- as it did in 2007 and 1989 before it --, and house prices stretch well above 4.0 times the average FTB salary, a correction begins and all bets are off.

During the last crash prices fell until the average house price was just over 2.0 times the average gross salary of first time buyers (Nationwide figures).

At any rate, seasonal adjustment is masking just how affordable homes really are. Government figures released yesterday showed that the average UK house price is £187,193. Yet the other three main indices, namely that of the Halifax, Nationwide and the Land Registry, show the average UK house price is around the £150,000 mark.

Halifax and Nationwide's affordability figures are based on the seasonally adjusted price. When we buy a house we don't get it cheaper because it is raining, and so in reality homes are actually a lot less affordable.

However, these indices have historically been measured based on seasonal adjustment and so using the last crash as a guide prices will fall until the average price is 2.0 times the average salary of a first time buyer according to those indices. Either way, we are in for some falls before the UK housing market hits bottom.