Where do house prices go from here?

The figures tell us that house prices are unsustainable at current levels and are likely to head dow

A big question is: where do house prices go from here? According to Halifax, house prices peaked in December 2007 and have fallen 17 per cent since then. Real house prices have fallen even further -- by around 27 per cent. Homeowners on trackers have done really well. Their payments fell sharply as interest rates fell to historically low levels after the Monetary Policy Committee (MPC) cut the Bank of England rate to 0.5 per cent. This has kept delinquencies down but it is unlikely to continue when interest rates rise. This will inevitably have a downward impact both on house prices themselves and, inevitably, on consumption also.

Based on house-price-to-earnings ratios (HPE), a measure of affordability, it does look as if house prices are unsustainable at current levels and hence still have quite a long way to fall.

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Chart 1 (click here for a bigger version) illustrates this, using data from the Halifax. The index stands at 4.45, compared with a peak of 5.81 in July 1987 and a long-run average from 1983 to 2000 -- prior to the house price boom -- of 3.64. The question is by how much. These numbers suggests that house prices have another 20 per cent or so to go, with the concern that, as has occurred in other house price corrections, there is a bigger overshooting before prices return to the long-run equilibrium. Interestingly, a comparison of gross rental yields, relative to a long-run average, also indicate that housing is at least 20 per cent overvalued.

But claims about the sustainability of HPEs come up against the counter-claim that low interest rates have made valuation metrics less useful as a guide to the sustainability or otherwise of prevailing house prices. Compelling new work by Paul Diggle from Capital Economics sheds some light on this issue. He argues that comparing house prices to equity prices, which should also have benefited from low interest rates, still suggests that house prices are about 15 per cent too high.

There are similarities, he suggests, between how equities and property "should" be priced. As a claim on a company's future earnings, the price of a share, he claims, should equal the present discounted value of the expected earnings to which it entitles the owner, with a suitable allowance for risk. An equivalent way of determining the "fair value" price for property is by using the present discounted value of the future stream of rental income, adjusted for risk and the costs of owning and maintaining property. So, Diggle argues, by lowering the rate at which future income is discounted, low interest rates should have benefited both asset classes. Even so, relative to a simple long-run average, the ratio between house prices and equity prices seems to suggest that either equities are around 15 per cent too cheap or housing is around 15 per cent too expensive. (See Chart 2 -- click here for bigger version).

graph 2

Given that the FTSE all share price/earnings ratio indicates that stock market valuations are very close to average historical levels, Diggle argues, there is little evidence for the former. The house-price-to-equities ratio seems to imply that house prices are higher than can be justified by low interest rates.

It is significant that the extent to which housing is overvalued on this new measure is similar to other measures, such as the HPE and rental values. The house-price-to-equities ratio adds to the case that a downward adjustment in prices is required. House prices look to be headed down.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

Photo: Getty
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How our actual real-life adult politicians are mourning Big Ben falling silent

MPs are holding a vigil for a big bell.

Democracy in action in the Mother of Parliaments has always been a breathtaking spectacle, and today is no exception. For a group of our elected representatives, the lawmakers, the mouthpieces for the needy, vulnerable and voiceless among us, will be holding a silent vigil, heads bowed, for the stopping of Big Ben’s bongs for four years.

That’s right. Our politicians are mourning an old bell that won’t chime for a limited period.

Here’s everything ludicrous they’ve been saying about it:

“Of course we want to ensure people’s safety at work but it can’t be right for Big Ben to be silent for four years.

“And I hope that the speaker, as the chairman of the House of Commons commission, will look into this urgently so that we can ensure that we can continue to hear Big Ben through those four years.”

- The Right Honourable Theresa May MP, Prime Minister of the United Kingdom of Great Britain and Northern Ireland, head of Her Majesty’s Government.

“There’s going to be a small group of us standing there with bowed heads in the courtyard… a group of like-minded traditionalists.

“We’re going to be gathering outside the members’ entrance, gazing up at this noble, glorious edifice, listening to the sounds rolling across Westminster, summoning true democrats to the Palace of Westminster.

“We’ll be stood down there with heads bowed but hope in our hearts.”

- Stephen Pound, Labour MP for Ealing North, Shadow Minister for Northern Ireland Where There Are Actual Issues.

“Why can’t they switch the bells back on when they stop working at 5pm or 6pm or whenever it is? Also why is it taking four years?… My own view is that Big Ben, whether it be the Elizabeth Tower or indeed the bell inside, it’s not just one of the most iconic British things, it’s one of the most iconic world things, it’s on a Unesco site.”

- Nigel Evans, Conservative MP for the Ribble Valley and Adult Human Person.

“Four years to repair Big Ben?! We could have left the EU twice in that time.”

- The Right Honourable Lord Adonis, formerly of the No 10 Policy Unit and ex-Secretary of State for Transport.

“I think Big Ben ought to be kept striking as much as possible during the repairs as long as it doesn’t deafen the work force.

“It would be symbolically uplifting for it to sound out our departure from the EU as a literally ringing endorsement of democracy.”

 - The Honourable Jacob Rees-Mogg, Conservative MP for North East Somerset and Our Future Overlord.

“We are being liberated from the European Union superstate and Britain will again be a completely self-governing country. Where will the eyes of the world be? On Parliament and Big Ben. It would be very strange if at midnight on that day it does not chime out, very bizarre. It is the heart of our nation.”

 - Peter Bone, Conservative MP for the Unfortunate Doomed of Wellingborough. 

Others have responded:

“[Silencing the bell is] not a national disaster or catastrophe.”

- The Right Honourable Jeremy Corbyn MP, Leader of Her Majesty’s Most Loyal Opposition (to broken clocks).

“When you see the footage [on Monday] of our colleagues who gather at the foot of Big Ben you will not see too many colleagues who have careers ahead of them.”

- Conor Burns (by name and by nature), Conservative MP for Bournemouth West and Parliamentary Private Secretary to the Foreign Secretary.

“I think we should respect people’s health and safety while we’re at work.

“To be honest, there are more important things to be worrying about. We’ve got Grenfell Tower, we’ve got thousands of people across our country let down who don’t get access to proper mental health care, and so on and so forth.

“Quite apart from what’s happened in Barcelona, let’s just get a life and realise there are more important things around.”

- The Right Honourable Norman Lamb, Liberal Democrat MP for North Norfolk, former Health Minister, and National Voice of Reason 2017.

I'm a mole, innit.