Tuesday, 5 February 2008

UK price to earnings ratio at an all time high

(click on the chart for a larger image)

The UK house price to earnings ratio has actually fallen marginally in the last months of 2007. House prices are now crashing; they are already down almost 5 percent since July 2007. However, prices will need to fall much further before the price to earnings ratio reaches its long term equilibrium level.


UK Homeowner said...

There are certainly signs of a correction but I think its a biot early to be calling it a house price crash yet. That could still happen of course. The market certainly needs a correction butit wont help anyone if we talk ourselves into a crash.

traderboy said...

uk homeowner...

i disagree. a crash will help me.

renting and have a slug of cash to buy when the time is right. however, i think it'll be at least 3 years before it'll be time to pull the trigger.

the crash is coming, whether we talk about it or not (although I agree it's not a crash yet).

Economic Despair said...

Oh boy, that is one nasty-assed chart. How does anyone buy a house in England?

traderboy said...

economic despair...

with the banks willing to lend below Libor, it's not that expensive to buy. this will end eventually, but in the meantime...

say you have a couple working in the financial sector in london, you'll be looking at combined earnings of £100k at least. after-tax, 60k. spend half that on a mortgage payment. if you can get a 5% mortgage, there's a £600k place you can buy. this is a pretty normal price for a nice 2-bed flat in a half-decent location in london.

the turn will come when layoffs happen and mortgage rates rise. this seems to be happening now.

as for the rest of the country, i think even more so it has been based on rising prices and overloading with debt.

eh said...

with the banks willing to lend below Libor,...

That and high LTV. Add in an ARM with a very low starter rate, meaning many marginal borrowers qualify only due to the artificially low initial payment. How common are ARMs in the UK?

Of course everyone is kept whole as long as prices rise, e.g. if a borrower cannot afford the higher payment later then he just sells. Conversely, everything comes apart if prices begin to fall. People who have put little into a house but borrowed money have next to no incentive to hang on.

House prices usually don't crash; stock markets do, partly in anticipation of the fact that significant and unrelenting house price falls will be a wipe out for the economy in general.

This is what you will see play out in the UK now, just as is happening in the US.

Welcome to the party.

Andy said...

Traderboy -

With a repayment mortgage, you are actually looking at £350-400k max for your couple. Interest-only mortgages are something of an abberation, not a realistic way to buy. I predict that come 10-15 years time, there are going to be a lot of 40-somethings suddenly realising that they haven't actually paid their mortgage off at all, after going IO.

And let's face it - you have a young, hard working, successful couple.. and the best they can afford is a pokey 2-bed flat.

Of course, what I really wonder is who is going to buy £400k flats in Swansea, where your young working couple is earning £30-35k combined. (Search for new flats in SA1 on rightmove if you don't believe me). Makes London look relatively cheap.

powerman said...

Looking at that graph I'd expect this crash to bottom out at a ration just below 3.

Whether that is achieved by a 50% reduction in house prices or substantial wage inflation (it's kind of a nice daydream but I won't hold my breath) is another matter.

Please, before anybody says 'it could never happen in a modern, relatively prosperous industralised democracy' remember that in Japan in the 90s, Tokyo residential real estate lost 90% of its value from peak to trough, and 80% off the value of the Nikkei.


And the Japanese households had a higher level of savings to tide them through.