Homebuyers could 'handle 30% rise'

HOUSE prices could comfortably rise by an average of £30,000 or 30% before families buying a new home feel the pinch, it has been claimed. With home loan rates at a 40-year low, monthly repayments are easily affordable, said the Nationwide building society.

Families currently pay an average of 23.9% of their take-home pay towards the mortgage each month. Base rates are expected to rise by only 0.75% to 4.75% by the end of the year, and the Nationwide said such a modest rise would leave room for a 30% surge in the price of the average property before families were affected. On that basis, someone buying a new home this coming December would have to hand over 35.8% of their take-home pay each month - which is still relatively modest.

The society said that even under a worst case scenario of a 2% leap in base rates to 6%, the great majority of families would be able to cope. It suggested that rates would have to go up to 6% and prices by an average of £60,000 before Britain returned to the boom and bust scenario of the late 1980s. At that time, when interest rates peaked at 15%, those buying a new home spent 58% of their monthly pay on the mortgage.

The society said the market has room for substantial price rises because at £100,000 the average property costs the equivalent of 5.48 times net salary, compared with seven at the end of the 1980s. However, it admitted the situation was worse in London and the South East, where prices are an average of eight times take-home pay, compared to nine times in the late Eighties. It is these areas and other hot spots where first-time buyers are finding it particularly difficult to get a foot on the property ladder.

A spokesman for Nationwide, which says prices are rising at 16% a year, said: 'As things stand, affordability is much better than in the 1980s. The only risk is a shock, leading to widescale job losses or a sudden fall in confidence. With mortgage rates set to remain relatively low it is likely that house prices could be even higher without major concerns.

'At the end of the Eighties Nationwide's typical mortgage rate was 12% compared with our current base mortgage rate of 4.74%. Even with a 6% base rate, house prices would need to be significantly higher to match the level of mortgage payments seen in the late Eighties. We estimate that a typical property could be £60,000 higher before mortgage payments accounted for the same proportion of take home pay. This suggests that prices will move higher without risking a dramatic slowdown.'