Thursday, 29 April 2010
UK Property Market – April 2010 Update
Why am I going to work and adding value to society? Let’s think about this for a minute. Let’s say I go out and buy myself an average residential house to live in with a 20% deposit. Once I’ve secured this I’m then going to get myself sacked from my job. I’m also going to ensure that I don’t have any other assets so I’ll spending all my retirement investing low charge portfolio on Burberry, 54” flat screen televisions and a sports car. After all these are necessities in modern day Britain. So now I’m set to get myself onto the Government mortgage rescue scheme.
Let’s run the numbers. My deposit was 20% so I owe £134,241. Now because I’m Mr Average I’m on an average tracker deal of 3.65% which means I have to find £408 per month to pay the interest. Of course I shouldn’t worry because the government gives me 6.08% of the mortgage value which is £680 per month meaning I can pocket £272. In addition to that my house has gone up in value by £3,283. Adding this together means my average annual ‘salary’ is (£3,283+£272)x12=£42,658 all tax free before I even claim my Jobseekers Allowance, Family Tax Credit or the myriad of other benefits I’m ‘owed’ because I’m a ‘hard working family’. A worker would have to earn £72,301 before tax for the equivalent of this asset price inflation and hand out. What a country we live in! I should note that I do have genuine sympathy for people who are genuinely out of work and actively looking. I’m just trying to show what sort of society we live in and how I could potentially play the system.
My question now is how long the party can continue.
Chart 1 shows the Nationwide Historical House Prices in Real (ie inflation adjusted) terms. The real inflation adjusted rise is £165,653 to £167,802 (a monthly rise of £2,149 or 1.3%) as the UK Retail Prices Index (RPI) month on month also rose.
This chart also demonstrates that compared to average earnings property is still very expensive when a ratio is created of the Nationwide Historical House Prices to the Average Earnings Index (LNMM). In 1996 this ratio was as low as 607 and today the ratio stands at 1,166. If we were to return to that number the average house using the Nationwide Index would be £87,414. Will we ever get that low again?
Chart 2 shows the annual change in Nationwide property prices and compares this with the change in the average earnings index (LNMM) released to February 2010 (so a couple of months behind the house price data). It shows that the annual change in earnings has risen sharply but is a long way behind house price rises. Houses are again moving further from the reach of the Average Joe.
So in summary Government continues to keep the plates spinning and maintains the house prices up ‘good’, house prices down ‘bad’ mantra. Bring on the deficit cuts (note the government word is deficit and not debt. Ie the debt is going to continue to grow) is all I can say although will they be brave enough to remove the props from the housing market.
For now I’m staying well away from the housing market.
As always DYOR
Last LNMM data is February 2010. Note first chart LNMM data is extrapolated to April 2010.
RPI data is extrapolated for April 2010.