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Friday, 7 January, 2000, 21:42 GMT
Housing: a bust to come?
House price rises in the UK and London
Property prices rose in December at a rate of 30% a year. Estate agents say it is not a repeat of the disastrous 1980s boom. Are they right? BBC News Online's Alex Hunt reports.

When the good times were rolling in 1989, property prices were rising at an annual rate of 34%.

The Property Maze
The cost of the average home, led by London, more or less doubled between 1985 and 1989.

We all know now that those increases pushed prices up to an unsustainable level. After a 33% slump the average property price only reached 1989 levels again in 1997.

The fluctuating value of a 50,000 property bought in London in 1983(Source:Halifax)
1983: 50,000
1985: 63,427
1987: 95,559
1989: 136,259
1991: 118,338
1993: 98,484
1995: 101,985
1997: 121,316
1999 (Jan-March): 149,425
1999 (July-Sept): 173,354
Many reasons are given for the subsequent fall in prices, including a general economic downturn and fast rising interest rates.

The result was that millions of people were living in homes worth less than the amount they had borrowed to buy them.

There were soaring repossessions from the dual effect of rate rises pushing up repayments and people losing their jobs.

No-one wants to see that sort of boom followed by bust market - also seen in 1972/73 and 1978/9 - returning to the UK.

The government, estate agents and mortgage lenders are all keen to play up the differences between the boom which burst spectacularly in 1989 and the current spiralling in house prices.

They say that prices are not rising as fast as then, that we are all richer now, and that with lower mortgage rates we can afford to borrow and pay more for homes.

Changing base rates
1985: 14%
1986: 12.5%
1987: 10.5%
1988: 9%
1989: 14%
1990: 14%
1991: 13.5%
1992: 10%
1993: 6%
1994: 5.25%
1995: 6.25%
1996: 6.25%
1997: 6.25%
1998: 7.5%
1999: 6%
Dec 1999: 5.5%
To some extent all those points are true, but there are worrying signs that things are about to change.

The UK's largest mortgage bank, Halifax, recorded property prices rising at an annual rate of more than 30% for the month of December. In the three months to the end of the year prices rose at a rate of 20%.

The average cost of a property in the UK is 83,000, up 10,000 on the year according to figures compiled from its lending by the Halifax, which will this week release details of regional breakdowns.

According to the latest, broader Land Registry figures, for July-Sept 1999, the average cost of a property in the UK was 97,600. In the London area this figure rises to 155,000.

If the 5% Oct-Dec rise reported by the Halifax is an accurate reflection of the general market, the cost of the average UK property will pass 100,000 when the Land Registry publishes its next three monthly figures.

With average UK earnings of 23,000, this will make the average home 4.3 times more than average earnings. This is approaching the house price-to-earnings ratio of five hit briefly before the bubble burst in 1989.

Average earnings in UK (London in brackets)
1980: 5,720 (6,604)
1985: 8,890 (10,660)
1990: 13,760(17,470)
1995: 17,470 (22,830)
1999: 20,800(29,210)
The situation in London is even more extreme. The average salary is 28,000, the average property price is 5.5 times that.

These sorts of prices have already begun to freeze some out of the London property market.

Even joint buyers - say a nurse and a teacher with a combined income of 45,000 - now find it difficult to buy more than a small flat unless they find a mortgage company willing to stretch the standard lending criteria of 2.5 times joint salary.

But, depending on which figures you use, the situation is still better than 1989. Average earnings are up about three quarters in the past decade while property prices are up by a more modest 15% to 30% from their peak.

Demand outstrips supply

Hugh Dunsmore-Hardy, chief executive of the National Association of Estate Agents, told BBC News Online that UK house prices were rising far higher for far longer in the late 1980s than they have done in the past two years.

The volume of transactions was also lower now than in the house buying frenzy of 1988.

The key reason for the previous bust was the sudden jump in interest rates, with no one suggesting double figure base rates looming on the horizon again, he said.

"Homes are much more affordable now than they were. Prices are rising because demand is far exceeding supply," he said.

Interest rate rises and the phasing out of mortgage relief will guard against prices reaching unsustainable levels: "What we will see is that the London and the South East effect will tend to push prices up in other areas such as East Anglia and the Midlands."

Uncomfortably close

Milan Khatri, chief economist at the Royal Institute for Chartered Surveyors, said that, like the Halifax, his forecast for 2000 is an 8-10% rise in prices.

Positive factors are the continuing fall in unemployment, the growth in two income households and the competition between banks, building societies and new internet rivals which are keeping low mortgage rates available for buyers.

These lower rates have meant that the monthly cost of the average mortgage remains far lower than 1989 in real terms.

Both Mr Dunsmore-Hardy and Mr Khatri have an interest in playing down boom fears, but the figures suggest estate agents are not being too inventive when they say we are not seeing excesses quite on the scale of 1989.

But those were excessive excesses, and we are getting uncomfortably close even to those levels again.

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See also:

06 Jan 00 | Business
House price inflation hits 13.8%
04 Sep 99 | The Economy
House prices 'could rise 35%'
16 Aug 99 | Your Money
Property market alert
19 Jun 99 | Your Money
Bust like the old days?
11 Oct 99 | Your Money
Let the property buyer beware
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