The Economist: House prices overvalued

Graham_Devon

Interesting piece of research.

They suggest that house prices in britain are 12% overvalued compared to income, looking at nearly 40 years of historical date.

If compared to rent, they are 29% overvalued. (price to earnings ratio).

However, they suggest that the British market may be sheltered from falls to bring them back in line, due to the low supply and increasing credit.

To make one point, this article is obviously pro HPI. Any decrease is "bad", and rises are "good news".

France seems particularly overvalued.

http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home

Thrugelmir

Graham_Devon wrote: »

To make one point, this article is obviously pro HPI. Any decrease is "bad", and rises are "good news".

I would read this as a warning.

Misalignments with our gauges of fair value can persist for a long time, of course. That may spare countries where house prices have clearly overshot from a painful bust, but it may also mean that some markets end up mimicking Japan’s long descent and badly undershoot. At some point, central banks will have to take away the balm of easy money. If housing markets remain so fragile when they are getting so much help, they may break when it is removed.

Help is only temporary. FLS is short term. So borrowing rates will rise at end of initial product term.

HAMISH_MCTAVISH

Graham_Devon wrote: »

They suggest that house prices in britain are 12% overvalued compared to income, looking at nearly 40 years of historical data.

Yes.

But they fail to note those 40 years included the 3 decades of the highest interest rates in the 350 year history of the BOE.

With interest rates of 5%, around the long term average, housing today is very, very, very cheap compared to the long term average.

If compared to rent, they are 29% overvalued. (price to earnings ratio).

Or rent is 29% too cheap.

I'd bet on rents rising 29% rather than prices falling 29%.;)

However, they suggest that the British market may be sheltered from falls to bring them back in line, due to the low supply and increasing credit.

Oh right.

So in other words, they note that the fundamentals of the market suggest that prices are not overvalued at all.

:rotfl:

HAMISH_MCTAVISH

Thrugelmir wrote: »

I would read this as a warning.

Help is only temporary. FLS is short term. So borrowing rates will rise at end of initial product term.

Blah blah blah.....

Doom doom doom....

etc

Do you never tire of being so spectacularly, relentlessly, catastrophically, wrong?

Graham_Devon

HAMISH_MCTAVISH wrote: »

Yes.

But they fail to note those 40 years included the 3 decades of the highest interest rates in the 350 year history of the BOE.

That's because they are not lookin at interest rates.

And surely if interest rates went up, it would simply serve to make them even more overvalued compared to income, if this is the route you seriously want to take? I don't think you thought it through.

wotsthat

British house prices have posted only modest overall declines over the past five years (although rising rents and incomes have also helped bring things closer to fair value). But the British market may do rather better than still-stretched valuations suggest. For one thing, it does not suffer from the glut of empty homes that has created ghost towns in Ireland and Spain. And according to the Bank of England’s latest credit-conditions survey lenders are more willing to make mortgage finance available than at any time since the financial crisis. The number of mortgage approvals for new purchases is at its highest for almost a year.

But house prices are 29% overvalued?

ukcarper

Graham_Devon wrote: »

Interesting piece of research.

They suggest that house prices in britain are 12% overvalued compared to income, looking at nearly 40 years of historical date.

If compared to rent, they are 29% overvalued. (price to earnings ratio).

However, they suggest that the British market may be sheltered from falls to bring them back in line, due to the low supply and increasing credit.

To make one point, this article is obviously pro HPI. Any decrease is "bad", and rises are "good news".

France seems particularly overvalued.

http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home

I suppose all they are doing is confirming Halifax data that shows earning to price ratio is about 12% above long term average.

HAMISH_MCTAVISH

Graham_Devon wrote: »

That's because they are not lookin at interest rates.

And surely if interest rates went up, it would simply serve to make them even more overvalued compared to income, if this is the route you seriously want to take? I don't think you thought it through.

the_flying_pig

that table very graphically shows some of many foggy patches to HAMISH's thinking. well, I say H but the author makes the exact same mistake:

"Spain’s bust reflects a massive oversupply of housing built in the construction boom, and an unemployment rate that rose to 26.6% in November, the highest in Europe"

HAMISH similarly always chirrups about 'fall from peak' as a measure:

"UK has the lowest fall from peak, this is because UK has the tightest supply-demand etc etc etc"

but fall from peak is a deeply flawed measure because it makes the following two hypothetical cases look very different [all numbers are average house prices]:

country A: 2002: $100k; 2007: $300k; 2012: $150k, 'fall from peak 50%'
country B: 2002: $100k; 2007: $200k; 2012: $150k, 'fall from peak 25%'.

now, H will tell you that country B's much smaller fall from peak is because of supply-demand imbalances etc. but what it really shows of course is just that country A had a bigger bubble. fundamentally they might be about the same.

H loves to bang on about how somewhere like Spain built too many houses etc but when you look at prices today versus income that table tells you that Spain is today, in January 2013, more overvalued than the UK [Spain is +21 on the income measure vs. +12 for UK]. it's just had a much bigger fall from a much higher peak. if UK really had some massive supply-demand yawn etc that made it different to other countries, wouldn't houses be less affordable here? I mean, really?

wotsthat

ukcarper wrote: »

I suppose all they are doing is confirming Halifax data that shows earning to price ratio is about 12% above long term average.

That's exactly how most people would describe it.

I wonder why a decent publication like the Economist would call this an overvaluation?

michaels

This analysis assumes that the proportion of income people are willing to spend on housing is invariant to income. I would contend that as incomes rise the cost of other expenditure might not change that much (food, energy, sky, mobile) leaving more spare income to spend on housing. Incomes in the UK have risen in real terms over the last 40 years, the supply of housing is restricted, is it really a surprise that we now spend a larger proportion of income on housing? Hasn't the standard of housing also increased during the period?