Property VS wages: 27% over-valued
Nationwide today suggested the mini house price boom of 2009 and early 2010 has run out of steam. It also published an update of a chart that has attracted plenty of attention in recent years.
The latest house price-to-earnings ratio is a little over 5.5 against a 'long-term average' (since 1980) of 4 - that implies prices would need to fall around 27% to be in line with the typical level of the last 30 years.
A bit of history on property ratio views
When looking at the price-to-earnings ratio in February 2009, house prices were wildly over-valued against wages - by 10% on Halifax's measure of long-term trend, or 38% over a far longer period for trend.
The same conclusion was drawn six months later by ex-MPC member David Blanchflower: 38% over-valued.
Today Ian Cowie of the Telegraph drew a conclusion in relation to first-time buyers: 28% over-valued.
Then, drawing on the relationship between prices and rents (a measure that it says makes more sense than price to earnings), The Economist concluded in January that UK house prices were 29% too high.
In April, Simon Lambert tackled the 'it's different this time' question. His conclusion and accompanying chart is well worth a look: House prices vs earnings: What next?
Purists will tell you that elasticity of markets means everything eventually returns to trend. The two problems with all of the above is:
- How do you find the true trend line? For house prices, do you take the average for the last 30 years (as lenders do), when house prices have been high vs earnings, or a much longer period?
- How long will it take to return to trend?
While warning house prices were dangerously overvalued last spring I also (luckily) warned that values could easily bounce back in the short-term. And earlier this year my best guess was that low rates should keep on supporting the mini boom.
The measures to tackle - spending cuts and tax rises - will erode economic growth and eat away, very slowly, at the factors that support house prices: employment and wage growth.
Created by Andrew Oxlade, Editor – Dailymail 02/07/10
