Global and UK house prices

The charts below show global house prices in relation to local incomes and historic rents.  Some of the prices are shockingly high, relative to reasonable economic comparators.

This first one, shows prices to incomes. To explain the chart, Italian house prices are seen as about the same, historically, relative to current income levels.

Whereas UK house prices, for example, are seen as c 30% over the long term norm in relation to incomes. Japan’s real estate prices are significantly lower than you would normally expect given income levels.

In the next chart prices are compared to prevailing rent levels.  Almost the same countries have over or under priced conclusions attached to them.

Notably, according to the Organisation for Economic Cooperation and Development and the International Monetary Fund, the UK’s house prices are even higher, relative to rents, than to incomes.

Either, in their analyses, this is because rents will rise to compensate or house prices will fall, eventually, to compensate.

It appears that, according to them, Australia and Canada – broadly similar economies to that of the UK – are, like the UK, in great danger of entering economic depression, in due course.  I am in good company there as, when I suggest that, the Governor of the Bank of England has said as much in recent pronouncements.  France, too.  Of course, much of the EU is already in Depression.

Let us consider.

The next chart shows the number of mortgages at approval stage by the members of the British Bankers Asscociation.

As you can see the number is significantly below that of the peak in prices in 2007 and way below peak lending 5 years prior to that.  Evidently, prices can rise with lower volumes.  And that is how it normally is.  Stella McCartney sells 1 dress at £25,000.  John Lewis sells 5000 at £200 etc.  Of course, when even Ms McC has to reduce prices you can bet your bottom dollar so is everyone below her.

Of course, prices have risen as volumes have fallen.  That will not always be the case.  Eventually, buyers will disappear and prices will fall as they quite simply can go no higher, without new buyers.  We also see that, recently, approval numbers have fallen.  The shape of things to come?  On verra.

Next we see how gross borrowing has risen quite strongly – primarily due to Help to Buy (or as I call it now Help to Borrow).  However, NET borrowings (after taking into account mortgage redemptions and reductions) are practically still on the floor at no growth or very tiny growth.  This does not bode well for the housing market or prices.

And either does borrowing by non-financial companies (AKA the real economy), as shown in grey, below.  Businesses are not borrowing and there has been a fall in lending to businesses for each of the last 3 years – not a reduction in the growth of lending, actual reductions in lending, annually.  This is the REAL economy, not the financial/banking one.  This is where house prices of ordinary mortals are.  Not the multi million pound pads of the ultra rich.

Consider this too, households’ incomes have not been keeping pace with the rises in the costs of living for 6 years.  This, again, cannot bode well for house prices.  The next chart shows incomes compared to CPI.

I’ll finish with a thought – one that I have expounded many times.  The next time we have a global economic shock, which can be expected, the Bank of England cannot slash the Base Rate, as it has done every time it got us into difficulties in the past.  The most they can cut is 0.5%.  That will not make the blindest bit of difference to the real economy.

You conclude, based on the above, what is likely to happen to house prices.  Let me know what you think.

 

Nothing in these articles can be taken as financial advice.  Neither Jonathan Davis nor Jonathan Davis Wealth Management will be held responsible for action taken or not taken from reading these articles.

We recommend investors seek bespoke advice before acting.

© 2014 Copyright Jonathan Davis – All Rights Reserved

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29 Responses to Global and UK house prices

  1. Pingback: #Carneyge on UK house market | You couldn't make it up

  2. Mike says:

    How do they factor in the fact that the average mortgage term in Sweden is 200 years?

  3. Anonymous says:

    intersting article. seems germany’s high CGT on homes sold before 10 years of ownership has kept the prices in check

    • I would say it was the cut in salaries at the creation of € kept prices from soaring.

      • Anonymous says:

        well, the same thing happened in other eurozone countries re salaries (and even more so in the UK) and they still had soaring house prices. and german engineers still earn double what US engineers do (and the gap to management wages is far smaller, being a more unionised, egaliterean country)

        you would be astonished by the size and quality of house you can buy in germany or austria in comparison to the UK. the main reason for this is punitive CGT on houses sold before 10 years and a heavily regulated rental sector which stops rachmanite slum landlord parasites from exploiting the poor. you want to see how astonishingly reasonable rents are in berlin and how much better the housing stock.

      • i would be so astonished. i know very well.
        no, it is bcos there has been no lending bubble in Germany, to speak of

        regulation NEVER brings quality to consumers.

      • Anonymous says:

        there is not a huge mortgage bubble in germany because speculation is punished through the tax system. don’t you think that if the UK had a 15% CGT on properties sold before 10 years (as in germany) there would be far less speculation and much less of a bubble?

        the excellent build quality and generous size of the properties are a result of regulation, too.

        you can’t say “regulation is always bad for consumers” – that is just a patently false thought terminating cliche, like “von” mises’ silly axioms or the far-right “the 10 cannots”.

        i guess it depends if you are on the side of ordinary people who need a place to live or rent seeking, rachmanite parasites and thatcherite, von hoogstraaten type gangsters.

      • The main factor in ANY bubble of ANY asset is easy lending. The taxation is not as important.

      • Anonymous says:

        if a cut in salaries at the creation of the euro suppressed house prices in germany (but strangely, not in other EZ countries) how come that effect has not been even greateer in the UK, where wages have been suppressed to an even greater degree for over 30 years?

      • Anonymous says:

        i don’t think the exponential rise in agricultural land prices is much to do with cheap credit as most big farmers and investors are buying in cash (according to the telegraph) , but a feudal tax system that allows landowners that to dodge inheritance tax, death duties (and many other taxes normal people are subjected to) and even to get grants from the CAP.

      • Apples oranges. Not real estate

      • Anonymous says:

        so when you said “The main factor in ANY bubble of ANY asset is easy lending. The taxation is not as important.”

        that was an error?

      • It was not an error. it was however assuming not hugely unreasonable taxes like 1970s

      • Anonymous says:

        i was talking about the effects of the numerous tax wheezes and subsidies that big owners of land enjoy at the present moment, which have made the value soar. an acre of agricultural land averages nearly 7k in the UK and only 4.5k euros for a HECTARE (2.5 acres) in france.

      • yes that is different to real estate. thank you Marxist CAP and rent seeking farmers

      • Anonymous says:

        the “marxist” CAP gives most of their subsidies to private water monopolies, saudi royals, serco, big agribusiness, aristocrats and institutional land owners. i don’t remember reading about that in Das Kapital.

        many of those mentioned above contribute to “free market” thinktaks, too.

      • Yous till don’t get there is no difference between marxism and fascism to you and me

      • Anonymous says:

        you write some really good articles, but if you are going to slate marxism, you should read some. if the UK was “marxist”, why is the running of everything being handed to serco and g4s? the only thing the state now owns is debt!

        interestingly, many libertarians like walter block and the PNAC neocon chickenhawks started out as doctrinaire marxists.

        friedman, “von” mises, rothbard and all of the mont pelerin boys certainly preferred fascism to marxism and thought them fundamentally different.

  4. I am not sure how they arrived at the Japan figures. Apartment prices in Tokyo are higher than in London. Banks are handing out mortgages practically for free, with interest rates as low as 0.5%. Rental yields are very low. Young professionals on JPY2-4m annual income live in shared rooms (yes shared rooms, not shared houses). On top of that, buildings typically last no longer than 40 years. And yet a 2 or 3 bedroom apartment can easily cost JPY80-90m, more than 10 times the typical income of a white collar worker.

  5. I believe the data shockingly underestimate the price / income ratio (at least for Italy).
    I believe they took gross income and not net income (the money left after the government take its cut). In Italy this would cause a serious underestimate, because the tax rate increased by 10% in twenty years (35% to 45%).

    • I have no doubt anything the IMF and OECD (and World Bank) does is tilted towards best light possible – except of course when the want to put fear of death etc so we’ll bail out their banks.

  6. Anonymous says:

    Interesting article thanks, you appear to be trying to argue that UK house prices are over-valued

    However I think it would be more interesting if you revised your first two charts by removing the irrelevant data and only showing countries where Mark Carney has ever headed up the central bank

    You will now find that measured on incomes or rents that UK house prices are significantly BELOW the average in that dataset and therefore can be expected to rise

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