Recent House Price Movements - over the last 10 years renting has become more popular as property price trends have risen – buy to let investors fuelling the price growth. The rental sector doubled in the 1990’s. The latest data shows property price rends continuing to stagnate – regional specific rises in the North and marginal falls in London and the South East. Nationwide predicted in May 2005, UK wide house price growth of just 2% in 2005, which would be the lowest annual rate of inflation in 10 years.

Long term price trends are demonstrated in the chart. As mentioned previously, price rises in the mid 1990’s forced an increased number of first time buyers to choose rental accommodation who could not afford increasingly expensive housing (relative to their incomes). Recent surveys have found that approximately 90% were unaffordable for the typical first time buyer in 2004, increasing to 95% in areas like East Anglia, the South West, South East and the North.

In other words, the performance of the rental sector is directly linked to house price affordability.

Historical trends show that when house prices rise, rents go down (and vice versa). People simply cannot afford to get on the housing ladder and are therefore forced into rental accommodation.

However, prices today are so high now that many buy to let investors are very nervous about entering the market – fearing a market collapse in property prices and falling rental yields.

House Price Affordability – the ration of income to house prices (affordability) has obviously increased… the ratio increased to 5.63 in September 2004 to 5.48 in February 2005 – still way over long-term average of 4.2. This is close to the peak of six times income in the late 80’s, when the housing bubble burst. However, during the 1980’s, an average of 80% of disposable family income (after tax) was made up of mortgage payments. It is no wonder the housing market collapsed then. In 2005, the proportion is only 25% (and rising).

In other words, these statistics suggest consumer confidence is holding up, despite the growing gap between earnings and prices – people are knowingly stretching themselves financially. That said, there is a close relationship between property prices and earnings – people have much more disposable income than 20 years ago.

So why have house prices increased so dramatically over the last 5 to 10 years? And are these structural causes still relevant in affecting future property prices? What will the impact be on the profitability of your potential buy to let investment if this continues? Buy to let entrepreneurs have certainly helped to push prices up but this is not the only cause of rising property prices…