House prices are falling. But it’s still terrible for first-time buyers

Hurrah. Housing is now more ‘affordable’ for first-time buyers than it was a year ago. Or so says Halifax, which has produced figures this morning showing that the average home now costs 6.7 times the earnings of the average worker, down from 7.3 times a year ago. This is thanks to two opposing trends. The value of the average home has come down from £293,586 to £286,276. Meanwhile, average earnings have increased by around 7 per cent.

Spot the missing factor from this analysis. Yes, that’s right: it’s interest rates. Housing is only more ‘affordable’ now than it was a year ago if you are lucky enough to be able to buy without a mortgage or you have someone happy to lend you money privately, interest-free. For everyone else, buying a home is definitely not more affordable than it was last year. Little over a year ago you could fix your mortgage for around 2 per cent. You would be extremely lucky now to fix it at less than 6 per cent.

If the average home now costs 6.7 times the average salary, that is way, way above what it was last time interest rates were at the level they are now. When I bought my first home in 1993, there was a very simple rule: to find out what you could borrow you multiplied your annual earnings by three. Add on a small deposit and it was hard for first-time buyers to afford a property that was valued at much more than three and a half times average earnings. That, as a result, was about the level at which house prices settled – before years of falling long-term interest rates tempted lenders to relax their lending practices, buyers were lured with offers of much larger mortgages – and house prices soared as a result.

If we are going to go back to the days of 6 to 7 per cent mortgage rates, then house prices are going to have to fall a lot further before they are going to be affordable for first-time buyers. If house prices are going to return to being 3 to 3.5 times the average salary they will have to halve. That doesn’t necessarily mean they will halve. More than half of owner-occupied homes are now owned without a mortgage, so there are relatively few forced sellers there. Some property investors have been forced to sell as a result of rising mortgage rates, but a lot will hang on and enjoy rising rental income. The mentality of property investors and owner-occupiers also comes into it: there are a great number who, once they have established in their heads an idea of what their property is worth, will refuse to sell it for anything less. The housing market, as a result, has a tendency to stagnate rather than crash.

But one thing is for sure: home ownership is not going to become affordable for first-time buyers unless the ratio of average home values to earnings falls to somewhere closer to its historic value of 1:3. That is going to require either a sharp drop in home values or a continued rise in earnings – or a combination of the two. There is unlikely to be a rapid resolution to the affordability problem.