Are house prices really back in a bubble?

Our national newspapers are mostly written in London – where house prices have risen nearly 18% in the last year. So if you read them, you will be firmly of the view that house prices are back in bubble territory, and that if you don’t buy now, you will miss the boat forever. But if you look more closely at the numbers, you will see that it simply isn’t so.

Instead, as the Council for Mortgage Lenders notes, most “of the property market… exists outside London… much of it is experiencing nothing like the euphoric conditions that are filling the London media column inches and broadcast news.”

London prices may have left their 2007 peaks far behind, but in northwest England, prices are still 11% below their old highs, before you even consider inflation.

In London, the average first-time buyer is borrowing around £200,000 – nearly four times their income – whereas outside London, they are borrowing a more normal 3.3 times their income (£110,000).

However, the key point to note is that £200,000 won’t get you much of a house in London, and nor will £110,000 get you much anywhere else.

So, many first-time buyers trying to get in to our overpriced market must have substantial parental support in the form of large gifted deposits. But what of those parents who would like to help, but can’t actually hand over £100,000 to get their child on the ladder?

There are ways you can help, says Nicole Blackmore in The Sunday Telegraph. You can offer an informal loan. You can take out a joint mortgage with your child so that your income is considered when the mortgage is calculated (try Coventry Building Society’s Step-Up mortgage).

You can use your savings to deposit money in an account that offers security for the mortgage (as with Barclays Family Springboard mortgage or Market Harborough’s Family Deposit). Or you can use your own home equity as security (as with Bath Building Society’s Parental Assisted mortgage).

But here’s the problem: do any of these and you put your own financial future at risk. With a joint mortgage you are jointly liable for payments. If you offer your savings as security, you not only lose the right to use them as you wish, but you run the risk of losing them if your child doesn’t make her payments.

The same goes for using your own home as security: if they don’t pay, you have to. You may think this is unlikely to be a problem; perhaps with wages now rising above inflation it isn’t.

But here’s a number to consider before you sign on any dotted lines: according to Halifax, 38% of parents who’ve helped their child to buy a house are now worried “about their own financial well being as a direct result”.

  • Angela

    Actually, where I live, in a very charming English cathedral city, starter homes do begin at £120,000 for a two bedroomed modern garden terrace. Unfortunately these are being snapped up by the buy to let landlords within days of coming on the market, and the kids never get a look-in.
    This concerns me, as these houses were built as low cost starter homes and it seems grossly unfair that investors, who can set their mortgages off against tax, are competing with young families who are being pushed out of the market.

  • Ellen12

    I agree Angela. The buy to let free for all has jeopardised life for a whole generation and the ‘investment’ angle is not about the bricks and mortar the houses are made of but the exploitation of the earning power of the generation that are, and continue to be, prevented from buying a home of their own. Tax, lending and government policy have thus far colluded against them in favour of this rentier class. It has become a form of financial slavery for many people and I hope it will lose George Osborne the next election.