A commonsense way of looking at house prices is to compare the ratio of house prices-to-earnings. Taking average UK house prices from 1952 to 2007 from here and average earnings from here (which is unfortunately an index, so let's work backwards from average weekly earnings in 2007 of £457 p.w. from here), we get this (click to enlarge):
Apart from the blip in the late 1970s, the chart pretty much illustrates Fred Harrison's 18-year-cycles, to wit peaks in 1953, 1973*, 1989 and 2007. If house prices now fall as far as in previous slumps, i.e. to a price-to-earnings ratio of four or less, then they will fall by about 50% over the next few years.
* Sure, the 1973 peak should have happened two years earlier, this is not an exact science.
** I started selling off my investment properties in 2002 because I assumed that a price-to-earnings ratio of 6 was a natural upper limit. More fool me.
Meh
2 hours ago
5 comments:
Mark, you need to consider movements in property rentals and property values to plot the future likely direction of house prices!
S, rents move pretty much in line with earnings. So if you know that wages will rise by ten per cent, you know that rents will rise by ten per cent. Rents are a 'normal good'.
I'm saving this up for a follow up post.
I wonder if house prices is the correct figure to look at. Isn't affordability (i.e. the cost of servicing a mortgage)more relevant. Interest rates have been much lower in recent years than at the previous peaks.
This is particularly relevant to the price of buy to let properties where sensible people ensure that the yield covers the mortgage cost (and some).
PP, superficially yes, that would flatten the curve somewhat - in Friday's papers it said that FTB's are now spending on average 35% of income on mortgage, "surpassing the previous high of 34% in 1990".
More fundamentally, it's not nominal interest rates that matter, it's real interest rates (i.e. interest rate minus inflation) which AFAIAA, is usually around 2%.
I've been involved in buying,selling and renting properties for 20 years now...at the moment I have no idea whats happening or whats going to happen...makes for an interesting life!
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