Only when property prices become genuinely affordable will the market get moving again

MILLIONS of us have exposure to property so we're bound to have a vested interest in believing that house prices will rise.

The British are unquestionably a property owning democracy, which sets us apart from many of our continental neighbours. Much of our previous government's economic policy was based on the simple premise that property prices will continue to rise, hence the consumer-fed debt crisis that we are now coming to terms with. Those who felt comfortable in the knowledge that their home was worth more than it was a year ago were also happy to take on additional debt in the form of credit card expenditure, additional borrowing against their property or simply a more affluent lifestyle.

The most widely held justification for house prices continuing to rise from current levels is the shortage of housing supply. However, I believe that there is plenty of evidence supporting an opposite view on property prices that is well worth considering.

The first point is that we are enduring a long period of abnormally low interest rates. Historically, the base rate has hovered marginally above inflation, but clearly the present picture is far removed from that.

This situation has contributed to a lack of forced sellers in the market, and hence prices have remained relatively stable. But at some future point what might be termed a return to "normalisation" is likely to occur. It's not possible to predict with any certainty when or indeed in what form such a change of circumstances might come, but it seems likely that such a shift will occur. If this is true, then we are likely to witness a glut of sellers in the market, which can only result in falling valuations.

In the mid to late 1990s, yields on rented property were about 9 per cent, while inflation was roughly 1.5 per cent. This represented a handsome real return for those renting out property, and simply explains why this form of investment became so popular. The gross yield now is a more modest 7 per cent which, after inflation at about 5 per cent, is a significantly less attractive proposition. Add in low rental income and maintenance costs and it becomes difficult to achieve a real return on your capital in this form.

So I would conclude that the issue with property is not to do with a shortage of supply, but rather a shortage of credit. Despite artificially low interest rates, it is still mighty challenging to borrow at a rate of, say, 5 per cent on an interest-only basis. We now exist in an era characterised by a return to sensible, prudent lending, in stark contrast to the previous decade of almost unlimited borrowing multiples at very low rates of interest. In other words, we are witnessing a return to good old fashioned affordability.The average age of a first-time buyer in the UK has now risen to the late thirties and the average purchase price represents a multiple of 4.3 times annual average income. This remains simply unsustainable and needs to correct before the whole property system can once again begin to function. The only way this can occur is for average prices to fall significantly from current levels.

I am sure I will not win any friends with this argument, but it might be a valid counter to the widely pronounced insistence that house prices are set to soar. Let's be realistic for a change.

• Ken Taylor is managing director of Mackenzie Taylor Wealth Management www.mtwm.co.uk