There has been a pile of stuff in the media about the house price boom. The FT is concerned that “House prices are booming in almost every major economy in the wake of the coronavirus pandemic, forging the broadest rally for more than two decades and reviving economists’ concerns over potential threats to financial stability”, and now seems to recognise that it is low interest rates to blame (“Extremely accommodating financial conditions”), although other pundits raise the usual concerns about affordability and the need to carpet green space with housing.
But in what sense is property actually unaffordable? The chart above shows the cost of an interest only mortgage on the average UK property 1980-2021, using the (admittedly) crude calculation of multiplying the average property price at the end of each quarter times the estimated mortgage rate.
Despite an apparently fantastic rise in property values over last 40 years, it turns out to be cheaper – in nominal terms – to own your own house than ever before, which surprises me at any rate.
It may seem fantastic but the average UK HP in 1980 was £22,677 and the mortgage rate was 15.7%. Now average HP is £242,709, more than ten times as much, whereas the mortgage rate is now about 1.1%, or about 1/15th. So the mortgage cost has gone down, and property is more affordable – not just in real but in nominal terms – than it was in 1980.
The catch, as the recent Lords report argued, is that the low interest rate environment disproportionately benefits older people such as myself, and discriminates against younger people. To benefit from the low rate, you need (1) a healthy loan to value, which a younger person won’t have, and (2) a healthy salary to satisfy the loan-to-income ratio that even the most imprudent bank would require, which younger people won’t have either.
This is not a problem that central banks will want to dwell on, for reasons which I assume are obvious.