UK House Prices

Overvalued - so where's the Crash?

It is fairly unanimous that houses in the UK are over-priced - 30% according to The Economist. I have been a long term bear for a decade as by every measure such as income, yield etc they seemed well due for a much greater correction than has occurred.

I remember Professor David Miles saying in 2000 that houses were expensive then and crucially consumers could no longer have their debts inflated away as they had in the 70's and 80's. However, there has been really no price crash and now Professor Miles believes that more falls are unlikely. In nominal terms, I believe he may be right.

Normal Rules No Longer Apply

This is not to say I think they represent a good investment, are at fair value or that you can "never go wrong with bricks and mortar". Rather, we are now in a period where normal investment rules no longer apply. Equities rally the worse the economic data is, in anticipation of QE. Commodities prices are largely driven by anti-dollar sentiment rather than supply/demand dynamics. Houses are no longer constrained by rental yields, opportunity cost of capital etc but are a massive speculative trade almost solely on central banking policy. Relative to Gold, UK house prices have crashed by about 50 - 60% but relative to cash they have upheld very well. Since cash is what most consumers on the house market sidelines will hold, and continue to get frustrated by negative real returns they could offer support to the market at least in nominal terms. Similarly, there a few forced sellers yet as interest rates remain low. Hence, as long as BOE policy holds, bizarrely house prices could remain over-valued for years to come.

Hobson's Choice

You win the lottery today - where do you stick the money? Due to the mess governments have got us into, there are literally no low risk investment choices for your average citizen. Cash used to give a marginally positive return with low volatility. It now gives a negative return with much higher risk. Central bank policy has now surpressed the yield on all asset classes. Since assets are valued as the discounted sum of future cashflows this creates greater volatility. Commodities are such a volatile asset class as they generate zero yield and now all other asset classes mirror this.

Who Cares?

Well, bankers love this as this is now a traders environment, rather than one for investors. It is a nightmare for your average worker or pensioner. Very few of us feel comfortable trading commodity futures in our lunch break! Hindsight trading would say we should have put all our savings in Gold but try doing that at today's prices and sleeping soundly tonight. Hence, consumers appear to be acting rationally with regards to housing. An owner will think yes I could sell but where will I put the funds. A potential buyer with £50k deposit is getting no return in their cash. They still have to pay their rent so even though they feel prices are over valued will still be right to consider housing as potentially no worse than any other option available.

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