Memorandum-to-the-Prime-Minister-on-Unaffordable-Housing

for much of <strong>the</strong> mid-1990s. It has now risen again and at <strong>the</strong> end of 2004 s<strong>to</strong>od at 107.4.
Given <strong>the</strong> unprecedented rise in house price levels it may seem surprising that affordability, in terms of takehome
pay used <strong>to</strong> pay <strong>the</strong> mortgage, should have remained relatively low in <strong>the</strong> early 2000s.The explanation
probably lies in a combination of fac<strong>to</strong>rs - his<strong>to</strong>rically low interest rates,‘low-start’ mortgage products and
leng<strong>the</strong>ned repayment terms are all possible fac<strong>to</strong>rs that reduce <strong>the</strong> month by month impact of expending
higher capital sums on house purchase. Clearly <strong>the</strong>re are dangers here if interest rates rise and/or disruptive life
events such as unemployment, disability or relationship break-up occur during <strong>the</strong> extended repayment period.
Summary - earnings, retail prices and house prices since 1952
Figure 1 shows <strong>the</strong> movements in gross earnings, consumer prices and house prices since 1952.The gross
earnings and house prices data are derived from <strong>the</strong> Nationwide website
www.nationwide.co.uk/hpi/downloads/UK_house_price_since_1952.xls and <strong>the</strong> consumer price data from
<strong>the</strong> Economic His<strong>to</strong>ry Resources site www.eh.net/hmit/ukearncpi. All three series have been reduced <strong>to</strong>
1952=1.00. It is possible <strong>to</strong> take issue with <strong>the</strong> particular measures used and no doubt changes in definitions
over half a century have produced some inaccuracies. But <strong>the</strong> main features of <strong>the</strong> comparative movements in
<strong>the</strong> three indices are clearly discernable.
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Figure 1 - Earnings, Prices and House Prices 1952-2004
70
60
House price index
Average earnings index
Consumer price index
50
40
30
20
10
0
1953
1960 1970 1980 1990 2000
Until about 1970 <strong>the</strong> three indices remained in close <strong>to</strong>uch and grew only very slowly. From about that year
<strong>the</strong>re has been a growing divergence between <strong>the</strong> consumer price index and <strong>the</strong> o<strong>the</strong>r two. Earnings have risen
much faster than consumer prices until <strong>the</strong>y now stand at about three times <strong>the</strong> prices index.This reflects <strong>the</strong>
Zacchaeus 2000 Trust - <strong>Memorandum</strong> <strong>to</strong> <strong>the</strong> <strong>Prime</strong> <strong>Minister</strong> - May 2005 37