Affordability ratio demands 27% drop in UK house prices

A new report from credit ratings agency, Standards & Poor’s (S&P), is predicting that the UK housing market is due a major (and likely painful) adjustment.

The analysis, entitled “European Economic Forecast: Major Corrections On The Cards As Housing Markets Turn Down” takes into account the fact that affordability in the UK has been declining since 2001.

House prices averaged 3.4x incomes in the final quarter of 2007, compared with 2.4x at the same point in 2000.

Property price inflation has left borrowers owing more over longer periods, with the result that mortgage interest payments now account for 20.6% of incomes.

This is close to the level reached in late 1988, when the UK’s previous housing crisis began.

According to S&P, if the affordability ratio is to return to its long-term average of 2.5x (and assuming incomes remain constant) house prices will have to drop 27%.

This level of decline is close to predictions for falls in the value of US homes, from pre to post the credit crisis.

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