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Negative response

If an Englishman&#39s home is his castle, it is also his most reliable barometer of wealth. Despite the increase in personal wealth from increasing share ownership and growing take-up of personal pensions, housing equity is still paramount.

So, when the Labour Party says in its manifesto that it wants low mortgages, that does not mean it is proposing to wrest back control of interest rates from the Bank of England but the party is trying to capitalise on the low interest rate environment.

What Labour also int-ends is to raise the spectre of the early 1990s when housing price deflation left so many suffering from negative equity.

So, when during the election campaign think-tank Cambridge Econometrics suggested the housing market in London and the South-east could experience a sharp correction, pushing some into negative equity, it hit the headlines.

By plotting average home prices against average earnings on a regional basis, it showed an historic ratio of three to one broken only by boom periods such as the late 1980s. House prices in London and the Southeast are currently at five and four times earnings respectively.

The question is how one defines affordability. That is, does affordability relate to the home or the mortgage?

Halifax group economist Martin Ellis says he broadly agrees with the Cambridge Econometrics report as far as it goes and that the South-east is far above average. But he points out that in addition to the price to earnings ratio, it is necessary to take into account how much earnings are going on mortgages.

Savills Private Finance managing director Mark Chilton, like many in the industry, agrees that simply comparing average house prices to average incomes is to use a very blunt tool.

He says: “I cannot bel-ieve that an outfit like Cambridge Econometrics can put out statistics that are so simplistic. There is no sign, anecdotally or otherwise, that there is a problem in the market. The present situation is fundamentally different to the late 1980s.”

But he does accept there is a problem with people getting into the market in London and the South-east. However, the fact that essential workers cannot afford to buy homes in London is not new and shows no sign of affecting the massive demand, acc-ording to Chilton.

Council of Mortgage Lenders figures for April show lending running at a record high. Gross mortgage lending was £12.6bn, with the figures for remortgaging slightly down.

According to the CML, affordability remains good, with borrowing across the board running on average 2.3 times income. Equity levels are also secure, with first-timers borrowing on average 78 per cent of property value and existing owner-occupiers borrowing 64 per cent.

What commentators point out is the importance of looking at interest rates and the cost of servicing mortgage debt.

CML head of external affairs Sue Anderson says: “On the interest rate side of things, you would be hard pushed to find someone who thinks they are likely to rise.”

Ellis points out that it was the rise in interest rates from 7.5 per cent to 15 per cent in a short space of time that caused all the difficulties.

Anderson says: “Interests rates can change and problems could arise, so we would not ignore the ratio of earning to housing prices. The Cambridge Eco-nometrics research is just another bit of information that is factually based, the reporting of which has been less factually based.”

While commentators do not accept that there will be a collapse in house prices, most will agree that the cost of homes in London relative to earnings has reached a point where the market will be constrained.

How do people afford to buy homes in London? Chilton says: “There is strong evidence of people using their own equity boost to help their children to buy homes.

“Lenders are also prepared to lend higher income multiples to certain young professionals. This is underwritten on the basis of affordability and future increases in income.”

As for the fact that essential workers cannot afford to buy homes in the Southeast, Chilton says that is something for the politicians but it has still not reached to point where demand, often from abroad, has stopped outstripping supply.

As for those who can afford to buy their homes, the message is cautious reassurance. Anderson says: “What advisers and borrowers should bear in mind is that what is available in terms of credit may not be desirable.”


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