The first law of bubbles is that they burst. It may take much longer for them to do so than anyone expects, but in the end, they do.
It is a matter of simple arithmetic that house prices cannot continue increasing at the same rate—or anything like it—as in recent years. Since 1992 house prices have more than trebled. That is an average annual increase of 8.1 per cent. Over the same period incomes have not quite doubled.
The average house now costs approximately £200,000. Average earnings are around £25,000. That gives the much quoted statistic that a home costs eight times income, a historically high figure. It would in fact be more realistic to make the comparison with what is left out of those incomes after unavoidable outgoings have been paid: income tax, national insurance and council tax. That reduces net income to around £18,000 and means that average homes cost 11 times average incomes.
Now we are told, in a report by the National Housing Federation published yesterday, that average house prices are likely to reach £300,000 across the country by 2012. If post-tax incomes rise by a perhaps optimistic 3.25 per cent a year they will grow to £21,100 by then. The average house would then cost over 14 times the average net income. An 80 per cent interest-only mortgage at 5.75 per cent would then cost £13,500 a year, leaving only £7,600 for all other household expenditure—down from £8,900 today. In other words, living standards for new householders would show a dramatic decline, a situation hardly likely to prove sustainable….