Thursday, 15 November 2007

This can't go on...

One thing is for sure, it is different this time.

Currently, UK average house prices are well over five times average earnings. Take a look at the chart above, and see just have far house prices have departed from earnings. The dark thick line in the centre represents the average since 1983. The broken lines above and below represents the standard deviations. The house prices to earnings ratio is now 2 standard deviations away from the long run average.

This can not continue. In fact, it has just stopped. Prices are now falling and this ratio is now returning to planet earth.

3 comments:

Inflation buster said...

Great chart.

Nationalist said...

You need to factor in interest rates. If 3x income is affordable at 10% then 6x earnings is affordable at 5%.

By which I mean the interest payments are affordable. Repaying the capital is a whole other issue.

But lots of people have no plans to repay the capital anyway. They plan to sell and move somewhere cheap and warm when they retire.

Patrick said...

The late 1980s boom led to a bust that dipped down as far as it rose, if that happens again then housing will be incredibly cheap.

The problem then will be if anyone can afford or be brave enough to buy.