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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A global marketplace: the internet represents exporting’s biggest opportunity

The advent of the internet age has made the whole world a single marketplace. Selling goods online through digital means offers British businesses huge opportunities for international growth. The UK was one of the earliest adopters of online retail platforms, and UK online sales revenues are growing at around 20 per cent each year, not just driving wider economic growth, but promoting the British brand to an enthusiastic audience.

Global e-commerce turnover grew at a similar rate in 2014-15 to over $2.2trln. The Asia-Pacific region, for example, is embracing e-marketplaces with 28 per cent growth in 2015 to over $1trln of sales. This demonstrates the massive opportunities for UK exporters to sell their goods more easily to the world’s largest consumer markets. My department, the Department for International Trade, is committed to being a leader in promoting these opportunities. We are supporting UK businesses in identifying these markets, and are providing access to services and support to exploit this dramatic growth in digital commerce.

With the UK leading innovation, it is one of the responsibilities of government to demonstrate just what can be done. My department is investing more in digital services to reach and support many more businesses, and last November we launched our new digital trade hub: www.great.gov.uk. Working with partners such as Lloyds Banking Group, the new site will make it easier for UK businesses to access overseas business opportunities and to take those first steps to exporting.

The ‘Selling Online Overseas Tool’ within the hub was launched in collaboration with 37 e-marketplaces including Amazon and Rakuten, who collectively represent over 2bn online consumers across the globe. The first government service of its kind, the tool allows UK exporters to apply to some of the world’s leading overseas e-marketplaces in order to sell their products to customers they otherwise would not have reached. Companies can also access thousands of pounds’ worth of discounts, including waived commission and special marketing packages, created exclusively for Department for International Trade clients and the e-exporting programme team plans to deliver additional online promotions with some of the world’s leading e-marketplaces across priority markets.

We are also working with over 50 private sector partners to promote our Exporting is GREAT campaign, and to support the development and launch of our digital trade platform. The government’s Exporting is GREAT campaign is targeting potential partners across the world as our export trade hub launches in key international markets to open direct export opportunities for UK businesses. Overseas buyers will now be able to access our new ‘Find a Supplier’ service on the website which will match them with exporters across the UK who have created profiles and will be able to meet their needs.

With Lloyds in particular we are pleased that our partnership last year helped over 6,000 UK businesses to start trading overseas, and are proud of our association with the International Trade Portal. Digital marketplaces have revolutionised retail in the UK, and are now connecting consumers across the world. UK businesses need to seize this opportunity to offer their products to potentially billions of buyers and we, along with partners like Lloyds, will do all we can to help them do just that.

Taken from the New Statesman roundtable supplement Going Digital, Going Global: How digital skills can help any business trade internationally

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