Buyers move in as prices hit lowest level in generation

PUBLISHED : Wednesday, 27 March, 1996, 12:00am
UPDATED : Wednesday, 27 March, 1996, 12:00am

British homes will become their most affordable for a generation this year because of tax and interest rate cuts, new research shows.

Buying activity will subsequently rise in both the mass and luxury residential markets, pushing up prices, according to commentators.

The TSB Affordability Index, compiled by British mortgage lender Trustee Savings Bank (TSB), shows the cost of buying a home will fall by more than 10 per cent this year to the lowest level since 1978.

The index tracks the percentage of a typical buyer's take home pay needed to cover a mortgage on an average home.

Commenting on the findings, TSB retail director John Elbourne said: 'Mortgage and tax cuts will work through to the house hunter's pocket by April.

'We believe buyers, anticipating the cheaper cost of home ownership, can start house hunting again in earnest,' he said.

Mortgage rates are at their lowest level for 30 years and are continuing to fall. The Nationwide Building Society has cut 45 basis points off interest rates on its variable mortgage to 6.99 per cent. The new rates will come into effect next month. Income tax was cut by a penny to 24 pence in the pound in the government's last budget; this will also come into effect in April.

The improved affordability levels will encourage first-time buyers to enter the market after having stayed away in droves during the recession.

The return of this buyer to the mass housing market is important to the entire residential sector because it will enable owners of cheaper properties to trade upwards in the market. This will create a spiral of increased demand right up to the luxury end of the housing ladder.

Mr Elbourne said the income tax and interest rate cuts were crucial to kick-start the housing market because weak prices were not enough to inspire buyer confidence.

The amount home buyers spent on a mortgage would fall from GBP30 in every GBP100 they earned in 1995 to GBP25.70 by the end the year, the TSB analysis showed.

House prices for the whole of the British residential market would rise by 2.5 per cent in 1996, based on an average of nine forecasts monitored by the Housing Market Report, Mr Elbourne said.

The analysis estimated the price of an average house would rise from GBP62,436 to GBP63,997.

Britain's two biggest building societies said house prices increased in January.

The Nationwide said prices were up by 1.4 per cent compared to December; the Halifax had them up 1.5 per cent.

Rising prices will not necessarily dampen affordability, according to the winter edition of Savills' Residential Research Bulletin.

Savills believes affordability for buyers in the mass market will only be slightly affected - even if prices rise as high as 10 per cent this year.

However, the agency believes prices will edge forward by a more modest 2 per cent in 1996.

Savills own affordability indicator takes into account the investment habits of households, as well as their disposable incomes, tax changes and interest rate movements.

The agency's research shows that high affordability levels usually precede or combine with a period of rising house prices. When house prices peak, affordability levels are at their nadir in the cycle, according to Savills.