Financial expert JAMES DALBY argues that a fall in York house prices is urgently needed

YORK'S house price boom is coming to an end but it has gone on for so long there remains a danger that boom will turn to bust. From today's levels the standard three-bed semi valued at £135,000 is around 42 per cent overvalued or, looking at it another way, prices could fall by 30 per cent to bring them back to what I see as fair value.

The falling interest rates experienced by borrowers are definitely welcome and today's low interest rate environment does look sustainable. But this is now more than factored into the city's house prices.

With the average household income in the city standing at £20,864, a three-bed family semi at £135,000 is valued at 6.5 times income. The national average at the peak of property prices in 1989 was 5.02, with the long-term average standing at 3.4.

With today's lower interest rates that long-term historic average should rise, but to a level of 6.5? I don't think so.

A case study is useful in illustrating the acuteness of the problems facing first-time buyers in York. A couple in their mid twenties, who plan to have a family, buying today for the first time are likely to be looking for a three-bed semi.

Let's say they each earn £16,500. With a bit of luck they will be able to persuade a lender to give them 3.5 times their joint annual income meaning a mortgage of £115,000.

A further piece of luck might see them with combined savings of £20,000 to fund the 15 per cent deposit needed to buy the house. At a competitive interest rate of 4.75 per cent a repayment mortgage would cost them £655.63 per month.

Shortly after buying their home the woman becomes pregnant and goes on maternity leave. After the baby is born she goes back to work part-time for 16 hours a week earning £5.20 per hour.

The household now has a combined income of £20,864, York's average. The monthly mortgage payment now represents a massive 46 per cent of their joint take-home pay (approximately £1,438) - not a comfortable level when you have all the other monthly costs of living, running a house and bringing up children to fund.

If mortgage costs were to swallow a third of take home pay, this would be a reasonable and manageable level. For the average income household this would mean a mortgage payment of £490.30 per month allowing a mortgage of £86,000.

Assuming a borrower puts down a ten per cent deposit, rather than the unrealistic 15 per cent mentioned earlier, this would equate to a property value of £95,000. At this level the house price to earnings ratio would be 4.6, which is rightly ahead of the national long-term average of 3.4, but not as ridiculous as the current 6.5 here in York.

Even at £95,000 the average 3-bed semi would have had a good run over the past few years. I remember looking at similar properties in York in 1996 and recall £60,000 being the going price. At today's value of £135,000 prices have increased on average by 14.5 per cent per year.

But even at £95,000 the annual increase would have still been a healthy eight per cent.

Any landlord who has been renting out such a property could have seen another 4.5 per cent in rental income after costs. So the total annual returns would have been 12.5 per cent as opposed to the 19 per cent that has actually been seen.

The council is right to make representations to Government on York's housing problems. The council's own staff are being priced out of the market as anybody who notes the wages offered in the job vacancies carried regularly in the Evening Press will see.

There are so many factors at play influencing York property prices and because it is a nice place to live it will always have a strong property market. That's a big part of the problem as it attracts high earners from other areas.

Indeed, one leading York estate agent has a link to a London-based property agent and is effectively marketing to well-heeled families from the smoke.

Do I think York property prices should fall? Yes. Do I think it is possible they will fall? Definitely. Consider this - the FTSE 100 share index grew by an average of 16 per cent per year in the six years up to its peak in December 1999 - it has since fallen by 42 per cent.

Even if York house prices stagnate, it could take up to 15 years before wages have risen enough to bring about sensible affordability for first-time buyers.

James Dalby is head of research at Bates Investment Services in Leeds, an independent financial adviser

Updated: 11:53 Tuesday, November 12, 2002