Let’s first update the key data being used to calculate both UK House Value and UK House Affordability:
- UK Nominal House Prices. In recent posts we have been comparing the different UK House Price Indices however for this analysis we will stay with the Nationwide Historical House Price dataset. December 2013 house prices were reported as £162,262. Month on month that is a fall of £1,591 (-1.0%). Year on year sees a decrease of £1,560 (-0.9%).
- UK Real House Prices. If we account for the devaluation of the £ through inflation (the Retail Prices Index) we see those falls accelerated. Month on month that decrease of £1,591 changes to a decrease of £2,385 (-1.4%). Year on year that £1,560 decrease grows to a decrease £6,625 (-3.9%). In real terms prices are now back to those around December 2002 (from March 2003 last month).
- UK Nominal Earnings. I choose to use the Office for National Statistics (ONS) Average Weekly Earnings KAB9 dataset which is the seasonally adjusted average weekly earnings of both the public and private sector including bonuses. November 2012 sees earnings at £472. Month on month that is an increase of £1. Year on year the increase is £7 (1.5%). With inflation (the Retail Prices Index) running at 3.0% over the same yearly period the purchasing power of those that work continues to be eroded.
- UK Mortgage Rates. The proxy I use to monitor mortgage interest rates is the Bank of England dataset IUMTLMV which is the monthly interest rate of UK resident banks and building societies sterling Standard Variable Rate (SVR) mortgage to households (not seasonally adjusted). December 2012 sees this reach 4.35% which month on month is a tiny uptick of 0.01% and year on year is an increase of 0.23%. We now need to be careful with this dataset and keep an eye on other mortgage types because the new Funding for Lending Scheme (FLS) is now starting to distort the UK mortgage market. I’ll provide full details in a post soon however I will say that 2, 3 and 5 Year Fixed Rate Mortgages are now continuing falling.
UK House ValueThe stock market uses the Price to Earnings Ratio (P/E) as a possible valuation metric. I choose to use the same metric to assess housing value and show this in my first chart below. For Price I use Nominal House Prices and for Earnings I use the UK Nominal Earnings multiplied by 52 to convert to Annual Earnings. This shows that today we are sitting on a P/E of 6.6 which down from 6.7 last month. This means property is better value this month than last. While being a long way off the peak value 8.3 we are also still a long way off of the 4.6 seen in January 2000.
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UK House AffordabilityI believe that the Average Joe out there doesn’t have any concept of house price value and instead is just interested in how much he can borrow from the bank which is effectively Affordability. I track Affordability using a dataset I have created which I call the UK House Affordability Ratio. I define this as the Ratio of Average UK Monthly House Repayments to Average UK Earnings at the point of the mortgage being granted.
Let’s first calculate the Average UK Monthly House Repayment. This is calculated by taking the Nationwide dataset, the Bank of England’s SVR dataset along with assuming a 20 year, 90% repayment mortgage (the actual value isn’t overly important as it is held as a constant through the dataset for comparison purposes) and is shown in the chart below.
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The reasonable monthly decrease in house prices combined with the tiny increase in the Standard Variable Rate sees the Monthly House Repayment fall from £920.26 to £912.11 month on month.
We then ratio this with the Average UK Earnings to arrive at the UK House Affordability Ratio which is shown below. Remove the credit boom and affordability continues to be range bound between 0.40 and 0.45 (represented by the orange lines). The combination of lower property prices combined with a small increase in salaries sees housing become slightly more affordable.
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I remain out of the market and am still satisfied with this decision for a couple of reasons:
- Housing is currently decreasing in price when measured in both nominal and real terms. Meanwhile my other assets, some of which will be used to buy a home (note I said home and not house as when I buy I don’t intend it to be an investment but rather somewhere for my family to live) continue to increase at rates well above inflation.
- There is clearly a lot of pressure on earnings given they continue to rise at levels less than inflation. This is occurring despite unemployment being reported as falling today. I believe this earnings pressure is going to continue for as long as the world allows itself to continue to globalise. This is going to eat into the disposable income that people have available to use for buying housing which will put further pressure on house prices. That is unless the Bank of England / UK Government can continue to drive down interest rates using the FLS or some other new wheeze, thereby preventing Mr Market from doing what should be happening were we operating in a truly free market.
As always DYOR.