Prior to 2000, lenders would let you borrow between two and a half times a joint salary or three and a half times one salary to buy a home. However, since then, lenders adapted these restrictions when they realised people had higher disposable incomes as they were having children later. For example, if your joint income was £30,000 and you had no kids, you could afford to pay a higher mortgage level than a family of four on the same income. This led to lenders offering higher multiples of income allowing you to be able to afford to pay more for a property than you would have done in the past.
Secondly, interest rates have been at an all time low in the last 10 years and are currently at a historic low. In the last recession when house prices fell, people couldn’t afford a mortgage due to interest rates rising as high as 15%! In the last 10 years, interest rates have fluctuated around 5%, allowing people to afford to pay more for property.
Finally, affordability of a property has also been affected by the amount of deposit that you have to pay. As people have got richer through good economic times and house prices have grown, if a first time buyer couldn’t afford a mortgage, in many cases, their parents or even grandparents would lend/give them the money.
So, affordability has a major impact on allowing property prices to grow, and increased access to more money for buyers at a low cost has meant prices have kept rising when under normal circumstances, they would have dropped back.
Actual unemployment and even the fear of unemployment has a major impact on property prices. If people who own properties via a mortgage are made redundant and can’t find another job or secure one at the same income level, they are likely to have to sell their property or have it repossessed by the lender.
And it’s not just those who are suffering redundancy that have to sell. Typically, as unemployment rises, the economy suffers too, so people start to lose confidence in what’s going to happen in the future. The fear of unemployment will prevent people from buying property if they don’t have to move, so prices start to fall as the number of buyers looking to purchase falls.
How confident people feel about their jobs and whether property prices are going to fall or increase in the future has a huge effect on property prices. While the media bombards us with bad news about the economy, wage freezes, people losing their jobs and reports property price falls, no-one is going to feel particularly confident about spending more money buying a new home that may then lose value.
However, if the news is all ‘good’ such as a booming economy, falling unemployment and rising property prices, people feel much more confident about buying and tend to be worried if they don’t ‘buy now’ they may not be able to afford a property in the future. As a result, when confidence is on the increase, property prices rise, when confidence is falling, property prices also tend to fall.
In summary, property prices are affected by the number of buyers and sellers and whether the types of properties being sold match the types of properties buyers want. This in turn is affected by people being able to afford to buy a property and how confident they feel about what’s happening in the economy and on the job front.
Kate Faulkner is one of the UK's foremost property experts and runs Designs On Property, an independent company that provides unbiased advice on all aspects of property - from property prices and investment to renovating and building. Leave a comment for Kate here.
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