Tuesday, March 8, 2011

UK 30% overvalued against long-run rent ratio

Global House Prices

In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay. Our index calculates the ratio of prices to rents in 20 economies

Posted by ontheotherhand @ 01:25 PM (3286 views)
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12 thoughts on “UK 30% overvalued against long-run rent ratio

  • Goes to show what a worldwide phenomenon overpriced housing is – as of course was cheap credit. So much for arguments about small islands and housing shortages.

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  • mark wadsworth says:

    LTF, yup.

    Are UK houses really only 30% overvalued? Feels more like 100% overvalued to me.

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  • Remember that the UK is 30% overvalued, but as can be seen from Japan, prices can go undervalue.

    So a fall greater than 30% should be expected. (otherwise I am off to Japan)

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  • The report doesn’t take into consideration that both buying and renting could be overvalued. In that case, at current prices UK house prices could be 100% overvalued and rents could be 66% overvalued.

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  • Ringing Roger says:

    British Blue, a valid question to ask, but as rents correlate strongly with incomes, they’re a reasonably good indicator of real residential property values

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  • France and Spain are more overvalued than we are. No wonder trichet is cautious about interest rate rises.

    All the fault of cheap credit …this site has been highlighting it since I first started browsing. I say put up rates, there are plenty of people who desire to own their own home (but at lower prices).

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  • I keep getting told its a ‘good time’ to buy – prices will go up… or recover. I even know people who have gone part time recently to start a buy to let business/ property development… the gravy train isn’t over… or people don’t feel that way yet.- it concerns me…. because there isn’t anything stopping the bubbles from reinflating – and thus reinforcing peoples beliefs that property is a good bet. Madness.

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  • @ britishblue

    On the flipside, a commenter on the original article makes the opposite point, suggesting that an ‘equally valid’ way to view the figures is to conclude that rents are undervalued. I am not so sure that either way of looking at it is correct, since I had always thought that rents, on the whole, fluctuate much less than house prices and are generally a fair reflection of supply and demand. But I may be wrong, and would be interested to hear people’s thoughts.

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  • mark wadsworth says:

    SS68, I know for a fact that rents are a lot lower in Germany for a nicer home (compared to England).

    Dunno about anywhere else though.

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  • Hang on a minute. 18 countries are overvalued, 3 are undervalued. Doesn’t that mean their methodology is screwed up?

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  • mark wadsworth says:

    D, nope, it is quite easy for housing to be overpriced in most countries at the same time, in the same way as gold is over priced in every country at the same time.

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  • ontheotherhand says:

    Their ratio is helpful but might need some tweaking. For example the over under value of the ratio for each country is based on the long run average in that country. Does this average take in the recent boom years? It shouldn’t because classic bubble theory says things will return to the long run average before the bubble started. The other factor is that if real interest rates shift to a new level in the medium term, then the rent ratio will shift. In Japan the yen in my pocket buys more and more each year so I mind less if the nominal value of my property goes down.

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