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How low can the income/house price ratio fall?

It has been revealed that there has been significant fall in the house price to average earnings ratio over the last 18 months. The figure hit a peak of 5.84 times earnings in July 2007 which coincided with the top of the UK housing market and the level has since fallen back to 4.44 in December 2008. But how low can the ratio fall and what impact will this have on UK house prices?

While mortgages are becoming more and more difficult to obtain in the current market conditions there are concerns that the above ratio could fall significantly over the next 12 months with a ratio of 4 times earnings indicating an average house price of £144,000, a ratio of 3.5 times earnings indicating a fall to £126,000 and more depressing of all, a fall to a rate of 2.75 times earnings indicating an average UK house price of £99,000.

Even though the 2.75 ratio is very much on the side of caution, and over cautious in the eyes of the majority of investment experts, we have seen some fairly large swings in this ratio during the current economic cycle. Even a fall to 4 times earnings would see house prices fall by around another £20,000 from the current level which is something which many experts would not be surprised to see. In this period of uncertainty it is very difficult to forecast the bottom of the UK housing market and it can be misleading to work on ratios such as the above which often "go out of the window" in these troubled times.

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