Tuesday, January 5, 2010

Global house price valuations

Ratio rentals

House prices are still far above their fair value in many countries—though no longer in America ( for 'Britain' +28.8% )

Posted by 51ck-6-51x @ 01:35 PM (2382 views)
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12 thoughts on “Global house price valuations

  • “Scarcity of supply or population shifts are often used to rationalise high house prices, but such fundamentals should push up rents, too.”

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  • mark wadsworth says:

    Re what C76 says, that was a blinding insight I first read on this here fine ‘blog a couple of years ago, and is the ultimate counter-argument to this whole “Britain is a crowded island” nonsense.

    The Nationwide sometimes include a chart in their monthly surveys showing ratio of prices to income and prices to rents, which map almost exactly. In other words, the rent to wages ratio is very, very stable (which I established as the first rule of house prices twenty years ago).

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  • The scarcity of supply story is absolute nonsense. There was no population explosion in 2002 when house prices went parabolic from fair value (nearly doubling over the next 5 years in Scotland) but guess what interest rates were rock bottom and banks were handing out multiples of 6 x salary. This has everything to do with the oversupply of £ almost nothing to do with the the undersupply of property.

    The double whammy for the uk is that the income part was generated by jobs related to credit and hosuing eg construction/ /banking/retail all credit/house as ATM related phenemenon and all now compromised.

    The uptick in housing over the past few months is eery, are things really that bad that we so badly need to keep the lie going.

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  • The undersupply argument only make any sense long-term if a growing proportion of houses are left standing empty. Reminds one of Centrepoint in the 70s.

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  • @1 – Remove record low interest rates, remove a lenient repossession policy, remove an upcoming election and remove Q.E, what are you left with? Funamentals!

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  • @estrader…. Freudian “Funamentals”

    Why is “fund a mental” so ironic when considering the housing market boom 😉

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  • @6- Can you believe I wrote that in Word first to check spelling but missed the BIG RED LINE!?

    When I use the term ‘FUNDAMENTALS’ I refer to natural/free market forces. Banks which made bad loans should have gone bankrupt along with those who over borrowed. You can’t say that it is supply and demand when prices are rising and a global financial crisis when they are falling. The GFC was the effect, not the cause.

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  • tenyearstogetmymoneyback says:

    Mark I thought we discussed this a few months ago along. I don’t think the ratio is stable at all.
    Otherwise how come people like me can afford to rent places we couldn’t possibly buy. At the same
    time there was a bit of a competition as to who had the highest price / annual rent ratio. At 40
    (based on 2007 prices) I think I am close to the top.

    Some time ago (it might even have been a couple of years ago) I read a long paper by someone
    at the Fed who used the same ratio to show how overpriced UK house prices are.

    Personally I have always beleived that renting should theoretically be more expensive than buying
    because of factors like void periods, letting fees, gas inspections etc. Of course the thing that breaks
    this rule is rising prices. Three years ago landslord weren’t even worried if they had a tennant as the
    big “profits” were from price rises.

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  • mark wadsworth says:

    @ Tenyears, the rents-to-wages ratio is incredibly stable, I noticed this twenty years ago and it is a cold hard fact.

    We are also renting a place towards the top of our budget limit, with a price-to-rent ratio of 40 (at 2007 prices) that I wouldn’t particularly want to buy (even at today’s prices, it would be eight times my salary), but if it fell to a price at which the theoretical mortgage (assuming 6% interest + repayment was the same as the rent) I’d happily buy it.

    (Then I’d knock it down and start again, because the location is great, the house is a monstrosity).

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  • tenyearstogetmymoneyback says:

    Hello Mark

    Thanks for the reply. In the previous post you said “prices to income and prices to rents”
    I can believe that “rents to wages” is stable. For a start it is very unlikely to exceed 1.
    In contrast with low interest rates some people seem to think that 10 x salary mortgages
    aren’t a problem.

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  • mark wadsworth says:

    @ Tenyears, to clarify, over the last ten or fifteen years,

    1. the price-to-rent ratio has trebled;
    2. the price-to-wage ratio has trebled but
    3. the rent-to-wage ratio has stayed the same

    I take it we are agreed on that basic observation.

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  • tenyearstogetmymoneyback says:

    Mark – I agree completely.

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