The signs that tell us that the housing price bubble will not burst

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Wage growth has never kept pace with soaring house prices in recent years, driving affordability to an all-time high.

Buyers now need 7.7 times their income to afford an average home, according to analysts at Capital Economics. This surpassed the previous peak of 7.5 needed before the financial crisis.

The affordability problem has so far been masked by record high mortgage rates and boosted savings throughout the pandemic, although runaway inflation and a higher cost of living threaten to strip these safety nets from borrowers.

Hamptons’ Aneisha Beveridge said: “Rising in the cost of living has been harder and more persistent than expected, which could lead to faster and higher than expected interest rate hikes.

“This could slow the market and is particularly likely to weigh on first-time buyers, whose incomes are squeezed by soaring inflation.”

Mortgage rates have risen steadily since October last year and borrowers are already paying hundreds of pounds more in interest every year.

However, interest rates are still low by historical standards and should protect property prices from a sharp decline.

Andrew Burrell of Capital Economics said: “Even if the Bank of England raises interest rates to 2% next year, as we expect, mortgage payments would still be much more affordable than in 1989 or 2007. [the previous property market crashes].

“We don’t expect house prices to collapse under their own weight.”

Capital Economics predicted that strong house price growth will continue through the summer. But by the second half of this year, rising mortgage rates and slowing inflation will have dampened buyer demand and slowed house price growth “to a blistering pace”.

“Only if house prices continue to rise sharply despite higher mortgage costs, or if the bank rate rises more than expected, should they fall,” Burrell said.

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