UK: Deloitte Monday Briefing: Where Is Housing Affordable?

Last Updated: 7 August 2014
Article by Ian Stewart

Most Read Contributor in UK, August 2017

A personal take on economics from Ian Stewart, Deloitte's Chief Economist in the UK.

  • UK housing has seen a strong rebound after the financial crisis.
  • According to the Office for National Statistics, the price of housing in the UK has risen by 26% since its trough in mid-2009 and growth has accelerated since last October. The latest figures show that house prices rose by 10% in the 12 months to May – the fastest annual rise in four years – and are 7% above their 2008 peak.
  • Rising house prices were initially welcomed as a symptom of recovery. But in recent months concerns about excess in the housing market have mounted. Last month, Mark Carney, the Governor of the Bank of England, remarked that "the biggest risks [to the UK economy] are associated with the housing market".
  • But how overvalued is British housing and how does it compare with house prices elsewhere?
  • A standard valuation yardstick is the ratio of house prices to incomes and to rents against long-term averages. At £262,000 the average price of a house in the UK is almost 10 times median annual earnings. The OECD estimates that UK housing is 23% overvalued against incomes and 32% overvalued against rents.
  • On the same measure US housing appears to offer rather better value. Despite having risen 22% since the trough in 2009, the OECD estimates that housing in the US is slightly overvalued against rents and 12% undervalued against incomes.
  • In Europe housing is most affordable in Germany, a nation which avoided the pre-crisis boom and the subsequent crash. German house prices have risen by 8.1% in the last year, but when adjusted for inflation they have remained broadly flat over the last 10 years. According to the OECD, German housing is significantly undervalued against both incomes and rents.
  • The financial and sovereign debt crises have led to sharp declines in house prices in peripheral Europe. According to the OECD, Portuguese and Irish housing has gone from being overvalued to undervalued. Spanish housing has fallen in value by 30% in the last 6 years but prices still remain somewhat above the OECD's long term estimate of fair value. Elsewhere in Europe, valuations are well above long-term equillibria in Belgium, France and Netherlands.
  • Across the 32 industrialised nations surveyed by the OECD the most overvalued housing is in Norway, New Zealand, Canada, Belgium and Australia.
  • For those with deep pockets and looking out for good-value housing, the countries with the most undervalued housing relative to incomes are Japan, South Korea, Germany, Ireland, Portugal and Switzerland.
  • Japanese housing is the cheapest in the OECD relative to rents and to incomes, with prices having dropped by 70% in the last 16 years.
  • On this basis Japanese housing appears to offer good value. But before ringing up estate agents in Tokyo it is worth noting that when things go seriously wrong with an economy the predictive power of valuation yardsticks weakens. Japanese house prices have falling since 1991 and prices have been in fair value territory for more than 10 years. The cautionary lesson from Japan is that in a slow-growth economy cheap housing can keep on getting cheaper.

MARKETS & NEWS

UK's FTSE 100 ended the week down 0.8%, hit by weakness in banking and financial stocks and weak UK manufacturing data.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

  • British consumer confidence fell for the first time in 6 months in July, having recently recorded the first positive reading in nearly 10 years
  • US consumer confidence rose to its highest level since October 2007, and well above economists' expectations
  • Nationwide reported that UK house prices increased at a monthly rate of just 0.1% in July, the smallest rise seen in 15 months
  • The IMF warned that the pound is overvalued by 5-10% in an update of its wide-ranging annual assessment of the British economy, with British manufacturing growing at its slowest pace in a year in July
  • US GDP grew at faster-than-expected annualised rate of 4% in the second quarter of the year, with first quarter GDP also revised upwards
  • 36 out of 37 prominent economists surveyed in a poll by the University of Chicago believe fiscal stimulus in the US has lowered the unemployment rate
  • The Royal Bank of Scotland warned that a yes vote for Scottish independence "would have a material adverse effect on the group's business, financial condition, results of operations and prospects"
  • The Financial Times (FT) reports that large Russian companies are moving some of their cash holdings to Asian banks, fearing that Russia could eventually be completely shut out of US dollar funding markets
  • Shares in troubled Portuguese lender Banco Espirito Santo fell 50% in one morning following disappointing earnings results
  • Macau casino revenue fell in June and July – the first declines in 5 years – with the World Cup blamed for distracting bettors
  • Japanese average life expectancy has surpassed 80 years for the first time, with Japanese girls born in 2013 having the highest life-expectancy in the world, at 87 years
  • The FT reports that Japan's preparations for the Olympic Games are being hindered by economic recovery, which has caused tightness across the labour market and inflated materials prices
  • Women in the Asia Pacific region will earn 41% less than men by 2030 according to Euromonitor, with Asia the only region in the world with deteriorating gender income disparity from now to 2030
  • British councils are expected to raise more than £600m in parking penalties for the financial year just ended, working out at 1,200 a hour or 1 every 3 seconds
  • Congressional Republicans threatened to sue Obama for bypassing Congress on changes he has made to the Affordable Care Act ('Obamacare'), with the President admonishing Congress to "stop just hatin' all the time"
  • A circus group which was denied a bank account on "moral" grounds because of its burlesque acts have now been offered the account "following some clarification of the nature of the business" – from 'can't do' to 'can-can'

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