In terms of income, UK housing has never been as expensive as it is today. According to the Nationwide, the first time house price to gross income ratio stands at over 5.1. Just to clarify what this ratio represents, we are talking pre-tax income here. Moreover, we are are talking about the first time buyer and not the average buyer. Let's not forgot that we are all paying a lot more tax as a proportion of income compared to ten years ago and average house prices are much higher than for first time purchases.
This chart screams out one unpalatable fact; this bubble has gone much further than the bubble in the 1980s. At that time, the price to income ratio peaked at just under 4. Take a guess at the ratio in London. In the first quarter of 2007, the ratio had reached 6.8.
Can the UK-wide ratio go any further? Could it go to 6? Would it push on to 7? Perhaps, in the fullness of time, it might reach 8? When do you think this ratio will reach a maximum? I reckon it is close to its maximum today. Moreover, it will return to its long run level, which is approximately 2.5. It can only do that if house prices crash. In order to come back to 2.5, the crash has to be massive.