UK House Value vs UK House Affordability – January 2013

This is the monthly UK House Affordability update, which is the metric that I believe is the key driver of UK House Prices.  It is also the update for UK House Value which is the metric I am using to assess when it is time to buy a UK home.  The last update can be found here.

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 Value

The 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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Unfortunately, the Average Weekly Earnings dataset limits this analysis to January 2000.  I however want to look at longer term trends to try and judge where fair value may be and even what P/E lows we could expect going forward.  To get an indicator of this I use an older similar dataset which was discontinued by the ONS in September 2010.  This was the Seasonally Adjusted Average Earnings Index (AEI) for the Main Industrial Sectors.  This dataset goes back to 1990 which is sufficient to take us back through the last UK property bust.  I then convert the Average Weekly Earnings dataset to an index and overlay both on the chart below.  This shows that today we are still nowhere near fair value.

 

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