Nationwise released their January market update on the 29th Jan 09.

This report shows that prices have fallen by 19% since they peaked in Oct 2007, including by 16.6% in the last 12 months alone. Although it seems to indicate the rate of decline is slowing down, we have not yet reached the bottom of the cycle because of where the house price to earnings ratio is.

House Price to earnings ratio: Probably the key interesting point in this report is the house price to earnings ratio. The long term average highlighted by Nationwide is 4, with some other sources putting it at 3.5 or maybe even lower. Either way, it is currently around the 5 mark.

Interpretation: This ratio should be reasonably constant in the long run, indicating the portion of incomes that people want to spend on their homes. At the peak of the recent bubble, this ratio was around 7, indicating the serious degree of overstretch people subjected themselves to in order to get on the property ladder. Similar hikes in this ratio have come up in the past at the peak of other housing bubbles and were always followed by its fall.

The graph indicates that house prices still have some way to fall before the market starts stabilising and finds it fair value again.

Early warnings: I found this 2002 article which talks about “the housing market suffering from speculative froth, with many resemblances to previous house price booms”. Curious how we as consumers all seemed happy enough to ignore this kind of warning which must have been one of the lone voices of reason in those boom years.

And how incompetent of the government to ignore this kind of analysis – oh, don’t get me started. Already in those days the ratio was rising above 4 which gave the author Tim Congdon cause for concern and prompted him to suggest that “a correction is imminent”. Well, it took 5 more years, and it is not a correction anymore, but more of a gentle crash. Yet again, the world demonstrated that it does not learn from past mistakes.

 

Copyright 2009 by CuriouslyInspired

Advertisements