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.

graph

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

Getty
Show Hide image

The dog at the end of the lead may be small, but in fact what I’m walking is a hound of love

There is a new, hairy face in the Hovel.

There is a new, hairy face in the Hovel. I seem to have become a temporary co-owner of an enthusiastic Chorkie. A Chorkie, in case you’re not quite up to speed with your canine crossbreeds, is a mixture of a chihuahua and a Yorkshire Terrier, and while my friend K— busies herself elsewhere I am looking after this hound.

This falls squarely into the category of Things I Never Thought I’d Do. I’m a cat person, taking my cue from their idleness, cruelty and beauty. Dogs, with their loyalty, their enthusiasm and their barking, are all a little too much for me, even after the first drink of the day. But the dog is here, and I am in loco parentis, and it is up to me to make sure that she is looked after and entertained, and that there is no repetition of the unfortunate accident that occurred outside my housemate’s room, and which needed several tissues and a little poo baggie to make good.

As it is, the dog thinks I am the bee’s knees. To give you an idea of how beeskneesian it finds me, it is licking my feet as I write. “All right,” I feel like saying to her, “you don’t have to go that far.”

But it’s quite nice to be worshipped like this, I have decided. She has also fallen in love with the Hovel, and literally writhes with delight at the stinky cushions on the sofa. Named after Trude Fleischmann, the lesbian erotic photographer of the Twenties, Thirties and Forties, she has decided, with admirable open-mindedness, that I am the Leader of the Pack. When I take the lead, K— gets a little vexed.

“She’s walking on a loose lead, with you,” K— says. “She never does that when I’m walking her.” I don’t even know what that means, until I have a think and work it out.

“She’s also walking to heel with you,” K— adds, and once again I have to join a couple of mental dots before the mists part. It would appear that when it comes to dogs, I have a natural competence and authority, qualities I had never, not even in my most deranged flights of self-love, considered myself to possess in any measurable quantity at all.

And golly, does having a dog change the relationship the British urban flâneur has with the rest of society. The British, especially those living south of Watford, and above all those in London, do not recognise other people’s existence unless they want to buy something off them or stop them standing on the left of the sodding escalator, you idiot. This all changes when you have a dog with you. You are now fair game for any dog-fancier to come up to you and ask the most personal questions about the dog’s history and genealogy. They don’t even have to have a dog of their own; but if you do, you are obliged by law to stop and exchange dog facts.

My knowledge of dog facts is scant, extending not much further beyond them having a leg at each corner and chasing squirrels, so I leave the talking to K—, who, being a friendly sort who could probably talk dog all day long if pressed, is quite happy to do that. I look meanwhile in a kind of blank wonder at whichever brand of dog we’ve just encountered, and marvel not only at the incredible diversity of dog that abounds in the world, but at a realisation that had hitherto escaped me: almost half of London seems to have one.

And here’s the really interesting thing. When I have the leash, the city looks at me another way. And, specifically, the young women of the city. Having reached the age when one ceases to be visible to any member of the opposite sex under 30, I find, all of a sudden, that I exist again. Women of improbable beauty look at Trude, who looks far more Yorkie than chihuahua, apart from when she does that thing with the ears, and then look at me, and smile unguardedly and unironically, signalling to me that they have decided I am a Good Thing and would, were their schedules not preventing them, like to chat and get to know me and the dog a bit better.

I wonder at first if I am imagining this. I mention it to K—.

“Oh yes,” she says, “it’s a thing. My friend P-J regularly borrows her when he wants to get laid. He reckons he’s had about 12 shags thanks to her in the last six months. The problems only arise when they come back again and notice the dog isn’t there.”

I do the maths. Twelve in six months! That’s one a fortnight. An idea begins to form in my mind. I suppose you don’t have to be a rocket scientist to work out what it is. But no. I couldn’t. Could I?

Nicholas Lezard is a literary critic for the Guardian and also writes for the Independent. He writes the Down and Out in London column for the New Statesman.

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism