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wish I could afford one

No Record High For House Prices

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This week it really did feel like I was bombarded with the "news" that house prices have reached a record high. It seemed to be in just about every form covered by the MSM. So I've taken some time out to run some analysis and as far as I'm concerned we are no where near any sort of record high. Here's my evidence:

131019-2.png

While I was at it I then ran some numbers to try and understand where prices can go from here. I believe prices are driven purely by punter affordability. This is my version of affordability:

131019-4.png

So what's that tell me? The continued manipulation by our government and the BofE looks to have squeezed a little moisture out of a dry dish rag but even that looks to be falling over. Where now? With interest rates now manipulated to what must be lows I'm banking on maximum increases in house prices over the medium term at a rate less than earnings increases. I can't even see them matching earnings increases when fiscal drag is combined with living esentials (leccy, gas, food) rising at a rate well above earnings increases. Those earnings are also going to rise at rates well less than inflation for the foreseeable future given we are now in a global world where we are paid far more than most and so must take a pay cut.

As for the downside. When you look at a chart like this,

131019-6.png

I see plenty of downside potential for house prices.

The full analysis including an explanation of how the house price indices are constructed, why I phase shift them for time and the calculation of affordability/value (plus a bit of a rant at no extra cost) can be found here.

So what next for me? More renting.

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Those earnings are also going to rise at rates well less than inflation for the foreseeable future given we are now in a global world where we are paid far more than most and so must take a pay cut.

The only thing I can see that puts a stop to the real wages declining is an international war.

Hows this for a conspiracy? Germany + a few others ask the US & US where their gold is, they reply that China has it and things kick off. B)

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Superb stuff as ever, RIT. I think it's worth running a few numbers against your monthly repayment chart to get a feel for a 'worst case scenario' in 2015.

If we start with 4.32% SVR/90% repayment mortgage against the Nationwide real house price index that gives us monthly repayments today of £958/month

Let's assume a 10% inflation-adjusted rise in prices over the next 18 months thanks to HTB, everything else the same, repayments = £1054/month

Now let's add a 0.5% rise in rates + 10% rise in house prices = £1099/month

Further, a 1.0% rise in rates + 10% rise in house prices = £1147/month

That's right. A mere 10% increase in prices + 1.0% increase in rates and we'd be very nearly back to the crash conditions of 2007. Assuming wage inflation of 1.5% over the same period then your Housing Affordability Ratio falls below the critical figure of 0.40.

UK house prices are already over-extended. These simple projections suggest that HTB will drive the market deep into a bubble regime.

131019-3.png

Edited by zugzwang

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