Following yesterday’s Property Watch on BBC2, We thought we’d set out more clearly precisely why house prices can’t stop falling yet. Its because of the affordability gap.
Until rents (which are based on earnings and are never far removed from these) can start generating a 6% yield on capital, or house prices, the latter must continue to fall.
For example:
Suppose a good quality 3 bedroom house in the south of England can command a rent of:
£900 pcm, or per annum: £10,800
LESS
Repairs: 500
Insurance: 500
Management: 1000
Net income: £8,800
X
YP in perp @ 6% = 16.666
Note: Its 6% because you can get 3% with money invested in secure investments and must get another 3% for taking the risk of tying your cash up in property.
Capital value = £146,660
But present asking prices are around £260,000 for property of that size in certain towns and by certain agents! Thats too high, in this particular case by: + 113,340!
Therefore, prices still have a considerable way to fall until equilibrium is again reached, and the market begins to function more normally.
The other factor which suggests house prices have further fall is the income-to-mortgage multiplier. This is currently at an average UK level of 6, but for house prices to be seriously viable that needs to fall to at, or near, 3 times income – meaning a significant fall in prices for everyone, (except perhaps Oligarchs).
It could be argued that this recent over-pricing may be explained by naive owner-occupiers’ assumptions of future capital growth. However most of us know that such growth is extremely unlikely these days, given the worrying current economic scenarios and we think agents need to take some of the responsibility for the current over-pricing, as well as owners.
Predictions:
Added to this, since interest rates are at an all-time low currently, the only way for the cost of borrowing to go, is UP. When this happens it is predicted that a large number of over-stretched house-owners will then be forced to sell.
This will flood the market with property for sale, driving house prices down even further 
!
Our current advice is, price it to sell now. Don’t wait for better times to come.
Property Match (UK): The modern way to market houses
I’m in agreement with your remarks about house values and the market not yet at the bottom.
Why is it that house-builders can get instant and accurate valuations on property which is to be taken in exchange for the sale of new houses but estate agents can’t give exactly the same advice to ordinary house owners wishing to sell?
If they could, that would get the market operating again.
Why not analyze the changes in house pices over the last two years and predict what is likely to happen to the market over the next year or two?