Affordability could be the key

One of the key factors affecting house prices is affordability. Affordability is frequently assessed by measuring the proportion of a new borrowers gross earnings required to pay their mortgage. Affordability is impacted by overall house prices and the level of interest rates.

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The big cuts in interest rates have meant that lower interest rates have had a significant impact on affordability, with the average mortgage payment standing at an estimated 21 per cent of the average new borrower's gross earnings in January, down from 31 per cent in the first half of 2008.

And although the house price to earnings ratio edged up to 4.55 from December's 4.48, it is still closer to its long term average of 4.0, and significantly lower than its peak of 5.84 in July 2007 according to research conducted by the Halifax.

This means with house prices continuing to fall along with a further cut in interest rates expected the long term average earning ratio of 4.0 could be reached this year.

However, despite this rebalancing of the market and restoration of the long-term trend, there are several reasons why activity in the market may stay subdued for some time to come.

Firstly, the banking crisis continues to restrict credit. The result of this is that many purchasers may be able to afford to buy and their subsequent mortgage payments however, the deposit required by banks and the willingness of them to lend will prevent many potential purchasers being able to progress a transaction.

Secondly, unemployment and the threat of it is likely to deter many potential purchasers from buying until conditions in the economy start to improve.

Property Hawks conclusion

Whilst we are seeing some positive movement towards re-establishing the long term trend in affordability, other negative factors are likely to weigh down on the housing market and house prices for some time. This makes it likely that affordability could actually dip below trend as it has done in previous recessions before then making a recovery. After the last slump in the early 1990s affordability slumped to just above 3 in the last quarter of 95 before making a slow and gradual recovery.