Much of the improvement seen in the housing market recently will be reversed when interest rates start to rise again, according to new research.
Property has become more affordable in recent months thanks to house price falls and interest rate cuts, but Capital Economics says that affordability will quickly worsen again once the Bank of England base rate rises back to about 4.5%.
The cost of paying a mortgage is currently 10% less than its long-term average and improvements in housing affordability have prompted many first-time buyers, who had previously been priced out of the market, to start househunting again. This has caused economists to say that activity in the market may have bottomed out.
But once interest rates start to rise, affordability constraints could become a factor again - especially if the trend is accompanied by higher tax rates.
Seema Shah, property economist at Capital Economics, said: "Measures of mortgage affordability are suggesting that houses are already good value. But these measures are reflecting the abnormally low current level of interest rates.
"When interest rates return to normal, affordability will deteriorate. This effect will be heightened by any rise in personal taxes."
Mortgage repayments for new borrowers are currently taking up an average of 34% of their monthly take-home pay - 10% less than the long-term average of just over 37%.
The group said this represented a dramatic turnaround from two years ago when new buyers typically spent 52% of their income on mortgage repayments, 40% more than the historical average.
But it warned that nearly half of this improvement had been brought about by the steep falls in the Bank of England base rate since October last year, which have reduced average mortgage rates from 6% at the end of 2007 to 4% now.
While mortgage interest rates were not expected to rise in the near future, with most economists expecting the Bank of England base rate to remain unchanged at 0.5% for at least the rest of the year, Capital Economics said it was reasonable to expect them to rise again in the medium term.
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