How do we get to three?

The house price to income ratio is coming down. At the end of last year, average house prices were 4.6 times average incomes, down from a peak of 5.9 during the autumn of 2007.

The FSA would like to limit mortgages to three times income. However, the market has a long way to go before this ratio is satisfied.

At the end of last year, average house prices were ₤158,437, with average incomes at ₤34,314. In order to get to a ratio of three, house prices would need to be ₤102,942, which is about 35 percent lower than where prices are now.

There is an alternative. Incomes could grow, with house prices remaining constant in nominal terms. What kind of pay rise would we need? Average earnings would need to rise to ₤52,812 - a rise of 54 percent. That could be easily sorted...if we suffered from a couple of years of double digit inflation.

When we begin to look at ratios such as debt-to-GDP, house prices to income, and mortgage affordability, we begin to see the diabolical attraction of inflation to New Labour and the Bank of England. Inflation is a stealth tax; it robs savers by rendering their liquid assets worthless in order to diminish debt levels.