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F T - U K House Prices / Household Earnings Ratio Is 50% Above Its Long Run Average

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Apologies if posted already, but too important to ignore. An FT article that calculates: "The ratio of UK house prices to annual household earnings is currently 50 per cent above its long run average."

" (...) UK and Australian homeowners, who borrow with adjustable-rate mortgages, enjoyed a windfall when rates came down during the financial crisis. British homeowners saw mortgage payments fall by two-thirds in the year to March 2009. This mortgage bonanza put a floor under the UK housing market and propelled a mild rebound in house prices last year. As a result, British house prices remain very expensive. The ratio of UK house prices to annual household earnings is currently 50 per cent above its long run average. "

http://www.ft.com/cms/s/0/b5e074f4-cd88-11df-9c82-00144feab49a.html

Whole article below.

Why some housing bubbles remain

By Edward Chancellor

Published: October 3 2010 11:30 | Last updated: October 3 2010 11:30

Housing bubbles appear pretty similar on the way up. Yet the aftermaths of recent real estate booms in the US, UK, Spain and Australia have been extremely varied. US home prices took a real hammering. The formerly hot housing markets of the UK and Spain, on the other hand, declined somewhat but never fully deflated, while Australian real estate prices have rebounded with remarkable vigour. Why have these housing markets, which not long ago marched in lockstep, produced such diverse outcomes?

One explanation is national differences in housing supply. Markets where land was readily available for development, most notably the US, were flooded with new construction during the boom period. Annual housing completions in the US climbed roughly 50 per cent in the five years to the market peak in 2006. The resulting oversupply of unsold properties has lasted to the current day. But in other parts of the world, including Britain and Australia, new housing supply didn’t keep up with rising home prices and there was no overhang of properties to sell off when the credit crunch struck.

Bubbles can still break, however, even when the market is not saturated with new buildings. The end of the Hong Kong property boom in 1997 is instructive. Despite little increase in new construction, residential prices in the former colony fell by some 50 per cent in real terms after the Asian crisis erupted. This points to the importance of monetary policy in cushioning a housing bust. Hong Kong’s currency was pegged to the US dollar and interest rates were set by the Federal Reserve in Washington. The Fed kept on raising rates even after Hong Kong’s real estate started to crumple.

Then there are national differences in the ways housing is financed. Although the Fed slashed interest rates in late 2007, this provided little benefit to US homeowners. That is because the US housing market is mostly funded with 30-year fixed rate mortgages and long-term rates didn’t decline significantly until after Lehman’s collapse. As the crunch set in, banks also aggressively tightened lending standards. The US housing bubble promptly collapsed and home prices reverted to their long-run mean.

By contrast, UK and Australian homeowners, who borrow with adjustable-rate mortgages, enjoyed a windfall when rates came down during the financial crisis. British homeowners saw mortgage payments fall by two-thirds in the year to March 2009. This mortgage bonanza put a floor under the UK housing market and propelled a mild rebound in house prices last year. As a result, British house prices remain very expensive. The ratio of UK house prices to annual household earnings is currently 50 per cent above its long run average.

Australian homeowners also benefited from lower mortgage rates and from a fiscal stimulus in 2009, which together added some 10 per cent to disposable incomes, according to Professor Steve Keen of the University of Western Sydney. In addition, the government spurred first-time homebuyers back into the housing market with an increase in the first-time home buyers’ subsidy to A$21,000 ($20,380).

These measures worked their magic. After falling by 5.5 per cent in the 15 months to March 2009, Aussie house prices have since risen by 23 per cent, according to the Australian Bureau of Statistics. As a result of these measures, a housing bubble psychology has revived down under. Australian house prices are trading at roughly twice their long run average multiple of household income.

Spain is perhaps the most perplexing of the recent housing bubbles. During the long boom, the Iberian peninsula was littered with speculative building projects. Construction peaked at a massive 18 per cent of GDP. The ratio of Spanish house prices to disposable income climbed from 3.8 times in the late 1990s to 7.7 times by 2007. Yet despite the severity of the financial crisis, which has driven unemployment to more than 20 per cent, the residential real estate market has proved remarkably resilient.

After doubling in the first half of the decade, Spanish house prices are down just 15 per cent in real terms. Spain’s house price to income ratio remains some 80 per cent above its long-term average. It is not clear why Spain’s house prices have proven so sticky. Housing transactions have collapsed and there have been suggestions official home price data do not reveal the true extent of the real estate carnage. The fact that Madrid provides generous mortgage support for the unemployed has also helped. Yet Spain cannot afford to support housing indefinitely.

These unburst housing bubbles remain a potential source of vulnerability to the global financial system. Inflated house prices also make it difficult for central banks to normalise interest rates when the time comes. Recent experience shows that government policies can stop housing bubbles from deflating. But they can’t make the problems disappear.

Edward Chancellor is a member of GMO’s asset allocation team

Edited by Tired of Waiting

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Yeah right. Lots of land in the US. Big shortage of land in .... Australia?

Markets where land was readily available for development (...)

= easy planning permits.

Physical lack of land is not a problem in most of Britain either. Only in central areas of large cities, mainly London.

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Really interesting article. Earning to house prices is to me such a crucial measure of where the market is at and I guess we will see prices continue to fall. Didn't know interest rates in America have so little impact on household income, can people not get out of fix rate mortgages? Finally Spain I feel will continue to plumet, I do expect prices to continue falling.

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There is no shortage of housing in the UK

If you just mean "shelter", I could agree. But our housing stock is the worst in the developed world. Both by quality and size. We could do with better and bigger houses. And we don't even need government funding for it, just liberalise planning, for goodness sake.

Edit to add: And here in the south-east we do have a very serious shortage. And outside central London, we do have plenty of space.

Edited by Tired of Waiting

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If you just mean "shelter", I could agree. But our housing stock is the worst in the developed world. Both by quality and size. We could do with better and bigger houses. And we don't even need government funding for it, just liberalise planning, for goodness sake.

Edit to add: And here in the south-east we do have a very serious shortage. And outside central London, we do have plenty of space.

My answer would be to move the entire government function up to Middlesborough, stop subsidising the banks and close the BBC.

That should help with the overcrowding in London, and we wouldnt even have to build over those lovely surrey commuter belt NIMBY fields.

:)

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If you just mean "shelter", I could agree. But our housing stock is the worst in the developed world. Both by quality and size. We could do with better and bigger houses. And we don't even need government funding for it, just liberalise planning, for goodness sake.

Edit to add: And here in the south-east we do have a very serious shortage. And outside central London, we do have plenty of space.

I live in North London - not a posh part - and there is no shortage of housing these neck of the woods. Overpriced and therefore inaccessible to most maybe but no shortage.

Our area is also surrounded by empty warehouses and ex factories.

And how many empty properties are there in the UK?

The problem is one of policy not of available land to create properties on as impled by porca misèria.

I think we are talking about slightly different things though - you are talking about a shortage of actual property NOW whereas i was remarking to the bog standard bull comment that there is not enough land in the UK and therefore we are all destined to fight over tiny shoe boxes worth millions of quid.

I suggest any shortage of property in the UK has nothing to do with land and everything to do with shoddy policy.

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QUOTE FROM FARTICLE:

"Housing transactions have collapsed and there have been suggestions official home price data do not reveal the true extent of the real estate carnage."

What more needs to be said with regard to the Spanish market?

IMO we are doing much the same with the VIs reporting fractions of a percent drops when, on the ground, prices have probably dropped 10% this year already (they are certainly down by AT LEAST this much in my elbow of the forest).

Edited by Realistbear

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QUOTE FROM FARTICLE:

"Housing transactions have collapsed and there have been suggestions official home price data do not reveal the true extent of the real estate carnage."

What more needs to be said with regard to the Spanish market?

IMO we are doing much the same with the VIs reporting fractions of a percent drops when, on the ground, prices have probably dropped 10% this year already (they are certainly down by AT LEAST this much in my elbow of the forest).

The indices must be majorly skewed along the lines somewhere, whether it the low approval numbers or London resiliance et al, but In Yorkshire, prices are probably 5-10 percent down this year. Also the housing stock I follow never had a rebound in house prices, they have been slowly dropping since the fall out from the banking crisis.

Patiently waiting in the wings.

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If you just mean "shelter", I could agree. But our housing stock is the worst in the developed world. Both by quality and size. We could do with better and bigger houses. And we don't even need government funding for it, just liberalise planning, for goodness sake.

Edit to add: And here in the south-east we do have a very serious shortage. And outside central London, we do have plenty of space.

Less building over the country at the expense of smaller houses is a price worth paying IMO. England, at any rate, feels more than overly built-up. Anyway, it's irrelevent to prices if there are still enough. If there's enough shelter then you should be able to get that at a reasonable price if it's not been stuffed by other factors (mostly over supply of credit), you just won't be able to afford as big a one as in some other countries. It shouldn't mean that it's almost impossible to even buy a shed.

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My answer would be to move the entire government function up to Middlesborough, stop subsidising the banks and close the BBC.

Not bad at all. Very good start.

Not sure it would be enough though. But it may be, I accept that, as I don't have the numbers.

That should help with the overcrowding in London, and we wouldnt even have to build over those lovely surrey commuter belt NIMBY fields.

:)

Feck the NIMBYs! :angry: See my sig.! :angry:

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I live in North London - not a posh part - and there is no shortage of housing these neck of the woods. Overpriced and therefore inaccessible to most maybe but no shortage.

Our area is also surrounded by empty warehouses and ex factories.

And how many empty properties are there in the UK?

The problem is one of policy not of available land to create properties on as impled by porca misèria.

I think we are talking about slightly different things though - you are talking about a shortage of actual property NOW whereas i was remarking to the bog standard bull comment that there is not enough land in the UK and therefore we are all destined to fight over tiny shoe boxes worth millions of quid.

I suggest any shortage of property in the UK has nothing to do with land and everything to do with shoddy policy.

I agree re. empty properties. I remember reading somewhere that there are some 200,000 second homes in Britain? And maybe up to a million empty houses? Not sure. Yes, it would help. We do need property taxes here. Like 1% of value/ year. Similar to low bands council tax, but all the way to the top at 1%, and no ceilings, and empty properties pay too. That would help.

And I agree that finances are the most important short term factor on HP. But in the longer terms, if we allow the supply of (good, FGS) housing to increase, this will push prices down (all the rest remaining the same). Supply and demand really.

Yes, we do have plenty of land. Bit without planning permit! That is my main issue here. (See my sig.) I just want to be allowed to build my own home, with my own money, and start a family! Kind of basic human right actually! No mansions! Simple, 3 bed, family home.

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QUOTE FROM FARTICLE:

"Housing transactions have collapsed and there have been suggestions official home price data do not reveal the true extent of the real estate carnage."

What more needs to be said with regard to the Spanish market?

IMO we are doing much the same with the VIs reporting fractions of a percent drops when, on the ground, prices have probably dropped 10% this year already (they are certainly down by AT LEAST this much in my elbow of the forest).

Yes, I think they do "massage" the numbers as much as possible, afraid of the typical stampedes when bubbles burst.

But the article also mentions some generous support "from Madrid" to unemployed mortgage holders. Probably coordinated with large Spanish banks, such as Santander.

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Apologies if posted already, but too important to ignore. An FT article that calculates: "The ratio of UK house prices to annual household earnings is currently 50 per cent above its long run average."

" (...) UK and Australian homeowners, who borrow with adjustable-rate mortgages, enjoyed a windfall when rates came down during the financial crisis. British homeowners saw mortgage payments fall by two-thirds in the year to March 2009. This mortgage bonanza put a floor under the UK housing market and propelled a mild rebound in house prices last year. As a result, British house prices remain very expensive. The ratio of UK house prices to annual household earnings is currently 50 per cent above its long run average. "

http://www.ft.com/cms/s/0/b5e074f4-cd88-11df-9c82-00144feab49a.html

Whole article below.

Thanks TOW. Good one. Another example that Central bank don't know what they are doing...

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Thanks TOW. Good one. Another example that Central bank don't know what they are doing...

You're welcome.

To be fair to Merv the BoE was planning to start raising IRs back in 2003. But Gordon Brown prevented that, by removing housing costs from the inflation index in Dec 2003 (RPI v CPI). Mervyn did oppose it, but not enough. He should have stand his ground, and even resigned. But the main culprit, by far, was Brown The B@stard. :angry:

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The indices must be majorly skewed along the lines somewhere, whether it the low approval numbers or London resiliance et al, but In Yorkshire, prices are probably 5-10 percent down this year. Also the housing stock I follow never had a rebound in house prices, they have been slowly dropping since the fall out from the banking crisis.

Patiently waiting in the wings.

Here in the south prices fell just a little from the peak until the spring 2009, and I think prices went back up to peak levels. But I think they are starting to fall again now. And this time it is London falling first. The cap on benefits could push down "London Prime" even more.

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Really interesting article. Earning to house prices is to me such a crucial measure of where the market is at and I guess we will see prices continue to fall. Didn't know interest rates in America have so little impact on household income, can people not get out of fix rate mortgages? Finally Spain I feel will continue to plumet, I do expect prices to continue falling.

The LIAR LOANS scam has been the secret weapon that a] fuelled and B] has fraudulently sustained the otherwise unsustainable property "market"......

LIAR LOANS are the life-fuel of the ENTIRE scam....

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The LIAR LOANS scam has been the secret weapon that a] fuelled and B] has fraudulently sustained the otherwise unsustainable property "market"......

LIAR LOANS are the life-fuel of the ENTIRE scam....

But they can't keep doping that any more. If they would keep pumping money into the housing market it would end up into the general economy, and increasing inflation also. Then, eventually (1-3 years?) they would have to raise interest by quite a lot, and the crash would be even worse, and just before the next election!

They can't do that.

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  • 145 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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