Lies, damn lies and statistics …

The answer depends on which ratio you look at. Pessimists focus on the ratio of average house prices to average earnings, which is currently at or above the levels seen in the house price booms of the early 1970s and late 1980s. Both of those booms ended in busts.

It is dangerous to ignore the lessons of history, but optimists point to a different ratio, that of average mortgage interest payments to disposable incomes, as a better guide to affordability. With typical mortgage rates below 5%, compared to around 15% at their peak in 1990, this debt service ratio is well below its level in 1990 despite much higher levels of debt today.

Who is right? There are valid arguments on both sides, but caution seems the best policy: first-time buyers are being priced out of the market in many areas and low expected inflation in the future means that mortgages may look cheap now, but the real burden of this debt will not decline over time. So we might not get a 1990s-style crash, but average UK house prices could stagnate over the next few years.

  • John Hawksworth, head of the macroeconomics unit at PwC.

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