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

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What kind of Christian is Theresa May?

And why aren’t we questioning the vicar’s daughter on how her faith influences her politics?

“It is part of me. It is part of who I am and therefore how I approach things,” Theresa May told Kirsty Young when asked about her faith on BBC Radio 4’s Desert Island Discs in November 2014. “I think it’s right that we don’t sort of flaunt these things here in British politics but it is a part of me, it’s there, and it obviously helps to frame my thinking.”

The daughter of a Church of England vicar, Rev. Hubert Brasier, May grew up an active Christian in Oxfordshire. She was so involved in parish life that she even taught some Sunday school classes. She goes on in the Desert Island Discs interview to choose the hymn When I Survey the Wondrous Cross sung by a chapel congregation, and recalls being alone in church with her parents, kneeling and singing together.

Despite her intense attachment to local CofE life, Theresa May’s role as a Christian in politics is defined more by her unwillingness to “flaunt” (in her words) her faith.

Perhaps this is partly why, as a Christian, May avoided the scrutiny directed at Lib Dem leader and evangelical Christian Tim Farron over the past week of his stance on homosexuality and abortion.

As Farron wriggled – first saying he didn’t want to make “theological pronouncements” on whether or not being gay is a sin (and then, days later, announcing that it isn’t) – May’s critics scratched their heads about why her voting record on such matters isn’t in the media spotlight.

She has a socially conservative voting record when it comes to such subjects. As the journalist and activist Owen Jones points out, she has voted against equalising the age of consent, repealing Section 28, and gay adoption (twice).

Although her more recent record on gay rights is slightly better than Farron’s – she voted in favour of same-sex marriage throughout the process, and while Farron voted against the Equality Act Sexual Orientation Regulations in 2007 (the legislation obliging bed and breakfast owners and wedding cake makers, etc, not to discriminate against gay people), May simply didn’t attend.

May has also voted for the ban on sex-selective abortions, for reducing the abortion limit to 20 weeks, abstained on three-parent babies, and against legalising assisted suicide.

“Looking at how she’s voted, it’s a slightly socially conservative position,” says Nick Spencer, Research Director of the religion and society think tank Theos. “That matches with her generally slightly more economically conservative, or non-liberal, position. But she’s not taking those views off pages of scripture or a theology textbook. What her Christianity does is orient her just slightly away from economic and social liberalism.”

Spencer has analysed how May’s faith affects her politics in his book called The Mighty and the Almighty: How Political Leaders Do God, published over Easter this year. He found that her brand of Christianity underpinned “the sense of mutual rights and responsibilities, and exercising those responsibilities through practical service”.

May’s father was an Anglo-Catholic, and Spencer points out that this tradition has roots in the Christian socialist tradition in the early 20th century. A world away from the late Victorian Methodism that fellow Christian Margaret Thatcher was raised with. “That brought with it a package of independence, hard work, probity, and economic prudence. They’re the values you’d get from a good old Gladstonian Liberal. Very different from May.”

Spencer believes May’s faith focuses her on a spirit of citizenship and communitarian values – in contrast to Thatcher proselytising the virtues of individualism during her premiership.

Cradle Christian

A big difference between May and Farron’s Christianity is that May is neither a convert nor an evangelical.

“She’s a cradle Christian, it’s deep in her bloodstream,” notes Spencer. “That means you’re very unlikely to find a command-and-control type role there, it’s not as if her faith’s going to point her in a single direction. She’s not a particularly ideological politician – it’s given her a groundwork and foundation on which her politics is built.”

This approach appears to be far more acceptable in the eyes of the public than Farron’s self-described “theological pronouncements”.  May is known to be a very private politician who keeps her personal life, including her ideas about faith, out of the headlines.

“I don’t think she has to show off, or join in, she just does it; she goes to church,” as her former cabinet colleague Cheryl Gillan put it simply to May’s biographer Rosa Prince.

The voters’ view

It’s this kind of Christianity – quiet but present, part of the fabric without imposing itself – that chimes most with British voters.

“In this country, given our history and the nature of the established Church, it's something that people recognise and understand even if they don't do it themselves,” says Katie Harrison, Director of the Faith Research Centre at polling company ComRes. “Whether or not it’s as active as it used to be, lots of people see it as a nice thing to have, and they understand a politician who talks warmly about those things. That’s probably a widely-held view.”

Although church and Sunday school attendance is falling (about 13 per cent say they regularly attend Christian religious services, aside from weddings and funerals), most current surveys of the British population find that about half still identify as Christian. And ComRes polling in January 2017 found that 52 per cent of people think it’s important that UK politicians and policy-makers have a good understanding of religion in the UK.

Perhaps this is why May, when asked by The Sunday Times last year how she makes tough decisions, felt able to mention her Christianity:  “There is something in terms of faith, I am a practising member of the Church of England and so forth, that lies behind what I do.”

“I don’t think we’re likely to react hysterically or with paranoid fear if our politicians start talking about their faith,” reflects Spencer. “What we don’t like is if they start ‘preaching’ about it.”

“Don’t do God”

So if May can speak about her personal faith, why was the nation so squeamish when Tony Blair did the same thing? Notoriously, the former Labour leader spoke so frankly about his religion when Prime Minister that his spin doctor Alastair Campbell warned: “We don’t do God.” Some of Blair’s critics accuse him of being driven to the Iraq war by his faith.

Although Blair’s faith is treated as the “watershed” of British society no longer finding public displays of religion acceptable, Spencer believes Blair’s problem was an unusual one. Like Farron, he was a convert. He famously converted to Catholicism as an adult (and by doing so after his resignation, side-stepped the question of a Catholic Prime Minister). Farron was baptised at 21. The British public is more comfortable with a leader who is culturally Christian than one who came to religion in their adulthood, who are subjected to more scrutiny.

That’s why Gordon Brown, David Cameron and Theresa May can get away with talking about their faith, according to Spencer. “Brown, a much more cultural Presbyterian, used a lot of Biblical language. Cameron talked about it all the time – but he was able to do so because he had a vague, cultural, undogmatic Anglicanism,” he tells me. “And May holds it at arm’s length and talks about being a clergyman’s daughter, in the same way Brown talked about his father’s moral compass.”

This doesn’t stop May’s hard Brexit and non-liberal domestic policy jarring with her Christian values, however. According to Harrison’s polling, Christian voters’ priorities lie in social justice, and tackling poverty at home and overseas – in contrast with the general population’s preoccupations.

Polling from 2015 (pre-Brexit, granted) found that practising Christians stated more concern about social justice (27 per cent) than immigration (14 per cent). When entering No 10, May put herself “squarely at the service of ordinary working-class people”. Perhaps it’s time for her to practise what she preaches.

Anoosh Chakelian is senior writer at the New Statesman.

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