House prices in London and Britain outstrip the global market.

 House prices in London and Britain are the highest, according to the Economist’s ‘house-price index; where housing health is assessed in 26 global markets. Twenty-one markets are growing by a median of 4.7% with Ireland and the USA taking second and third place behind Britain. China, Singapore, France, Italy, and Greece are the five countries where prices are falling, despite various government initiatives targeted at recovery.

To check the sustainability of house-price levels the Economist assesses two variables:

Affordability – calculated as a ratio of prices to net income per person

Investability – calculated as a ratio of house prices to rental income

As is the case in Britain house prices in Q2 2015 outstripped average income by 27 points; and rent charges (also in Q2 2015) were 47.1 points higher than house prices, the long-term average being 100 for both income and rent ratios. This would suggest that property in Britain is slightly more investable than it is affordable. The house-price index also indicates that Britain’s high house prices are unsustainable, hence the ‘bubble burst’ warning that is being published in some finance media.

But a crucial third factor to be considered is housing demand, in both Britain and the USA housing supply is falling well short of housing demand. New house builds numbered just 140,000 (March 2013- March 2014) representing a 25% shortfall when compared to the long-term norm. In the USA new house building is failing to keep pace with job creation lagging by as much as 60% in some cities.

Whilst demand fails to keep pace with supply in Britain it is expected that house prices will continue to rise. In a recent report by the Royal Institute of Chartered Surveyors (Rics) an annual increase in house prices of 4.5% was predicted over the next five years, with London and the Southeast rising at greater pace, more than 5% per annum. From January to December 2015 they report an 11-month stretch where buyers outnumbered suppliers, with a boost of activity in December, perhaps triggered by landlords rushing to complete before the introduction of the ‘landlord tax’.

In London and the Southeast house prices increased by 9.8% over the year, the average price of a London residential property being £506,742 up 11.2% from December 2014. It is clear that house prices in Britain and in particular in London and the Southeast are rising well ahead of pay increases. The Office for National Statistics (ONS) report a 7.7% increase in house prices (December 2014 to December 2015) which tracks against a 2.4% pay increase only. They have confirmed that the average age of a first time buyer has risen from 30 to 40 in less than a decade.

As the British housing market is changing so rapidly the case to review protection policies is strong. Policies range from life assurance, where the outstanding mortgage debt is paid in the event of the policyholder’s death, to policies that cover life-shortening events such as critical, or terminal illness. The mortgage product, property (portfolio) value, lifestyle and age of the policyholder are factors that require careful consideration.

Please contact our protection and life assurance expert Hamish Gairns to ensure that you are adequately protected.