Here’s an intriguing chart I found in the archives. This is the nominal mortgage cost of the average UK house from 1980 to the end of 2017. Don’t take it too seriously. The crude methodology is as follows. Take the average UK house price from the Nationwide index, andihe short term interest rate for the relevant quarter, adding on 50bp for the likely spread charged by the lender. It turns out the nominal (not the real) cost of the interest charged has not changed significantly since 1980.
I have to pinch myself every time I look at this. Impossible! Think how much earnings have gone up since the days of pinstripe suits and hairstyles that were a fire hazard.
But it’s true, because we forget how high interest rates used to be. In March 1980 the average house would cost you about £23,000. But the interest would have been about 15%, so the interest cost would have been about £3,500 a year. Fast forward to the end of 2017, when the average house now costs over a quarter of a million. But the interest rate has fallen to below 2%, resulting in an interest cost of about £4,500. Result: no housing crisis, housing is very cheap! Indeed a member of my immediate family was offered a deal of 1.8%, immediately halving the cost of rent.
As Ian Mulheirn suggests, see e.g. my post here, is it the fall in global interest rates that has driven the phenomenal increase in housing prices across the world?
Of course it’s not nearly as simple as that, but enough for now.