Saturday 19 October 2013

No Record High for UK House Prices, says RIT

UK house prices rose to a new high in August, according to the Office for National Statistics (ONS)” reports the BBC.  “House prices in August were 3.8 per cent higher than the previous year at £247,000 - topping the previous all-time high recorded in January 2008, according to the Office for National Statistics” reports The Telegraph.  “Average house prices in the UK leapt to a record high of almost £250,000 during the summer” reports The Times.  Sometimes I really do despair.  Is there no decent journalism left in this great country of ours?  Before we even get into this posts content let’s be clear.  A new house price high has not been hit.  The last high was back in 2007 and we are nowhere near that today.  Let’s now run the numbers to prove it.

Firstly it’s important to understand that there are a multitude of UK House Price Indices out there with every one of them measuring something different.  I track five of them:

  • The Rightmove House Price Index.  It calculates its house price by simply taking the Arithmetic Mean or Average asking price of properties as they come onto the market.  This means it will be affected by price changes, if the mix of house type changes and if the mix of location changes for houses coming onto the market.  It is not seasonally adjusted and covers properties from England and Wales.  So this index really doesn’t track house prices as no purchase is required for it to appear within the index making it pretty much worthless.  I only use it as a possible leading indicator (see below).
  • The Acadametrics House Price Index.  This index uses the Land Registry dataset but in a different way.  It calculates its house price by taking the Arithmetic Mean or Average of bought prices.  It then mix adjusts the data to take a constant proportion of property types, from a constant mix of geographic areas.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  
  • The Halifax House Price Index.  This index is based on buying prices of houses where loan approvals are agreed by Halifax Bank of Scotland.  It uses hedonic regression to remove type and mix variations thereby measuring the price of a standardised house.  I use the non seasonally adjusted dataset and it covers the complete United Kingdom.  
  • The Nationwide House Price Index.  This index is very similar to that of the Halifax except it is based on buying prices of houses where loan approvals are agreed by Nationwide.  
  • The Land Registry House Price Index.  This index uses repeat sales regression on houses which have been sold more than once to calculate an increase or decrease.  As it analyses each house and compares the latest buying price to the previous buying price it is by definition mix adjusting its data also.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  

To use these indices we must also remember there is a timing shift between the indices.  Firstly, a house is placed on the market for the first time (the Rightmove Index).  Secondly, somebody possibly buys the house using a mortgage (the Nationwide and Halifax Index).  Finally, the purchase is registered with the Land Registry (the Land Registry and Academetrics).  The best estimate of this timing shift is shown in the chart within the paper by Robert Wood entitled A Comparison of UK Residential House Price Indices.

Let’s apply this timing shift, place all of the indices onto a chart and look at what we have.

House Prices according to Rightmove, Nationwide, Halifax, Land Registry and Academetrics
Click to enlarge  

The Nationwide, Halifax and Academetrics, while showing a recent uptick, are all nowhere near record highs.  The Rightmove Index suggests a record high was reached in August and Academetrics shows we have just seen one.  The argument is flawed though because all of these indices are measured in a currency which is being continually devalued through inflation and so is not a constant.  Let’s therefore correct for that and have another look.

Real House Prices according to Rightmove, Nationwide, Halifax, Land Registry and Academetrics
Click to enlarge  

That looks pretty compelling to me.  UK House Prices are nowhere near a new high.

That said I am actually a little surprised that house prices are actually rising in non-inflation adjusted terms at all.  Sure we have plenty of government / Bank of England manipulation schemes in place to try and encourage the punters but when net pay increases are only around 0.5% while we see electricity going up 10.4% along with big increases in food, gas and fuel over the last few years I’m struggling to understand where the disposable income is coming from.  Let’s therefore look at how much of our average punters pay cheque is going on mortgage payments.

UK House Affordability

I believe that the average man on the street knows the price of everything and the value of nothing.  So when he comes to buy a house he doesn’t look or try and assess value but instead is just interested in how much he can borrow from the bank.  This is effectively Affordability.  I try and assess Affordability using a self created UK House Affordability Ratio dataset.  It is defined as the Ratio of Average UK Monthly House Repayments to Average UK Earnings at the point the mortgage is granted.

Let’s first calculate the Average UK Monthly House Repayment.  This is calculated by taking the Nationwide dataset, the Bank of England’s Standard Variable Mortgage Rate (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.

Graph of Starting Monthly UK House Repayment
Click to enlarge 

This shows that between 2010 and early 2013 house repayments flat lined but more recently they have started to rise again having broken out of a repayment range.

We then ratio this with 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 about 0.40 and 0.45 (represented by the orange lines).  It has however crept a little higher over the past few months and sits at 47% this month.

Graph of the UK House Affordability Ratio
Click to enlarge 

So can house prices go higher from here?  If affordability really is the driver then for house prices to rise we are going to need interest rates to fall or household earnings to increase.  Interest rates are now so manipulated that I can’t see how the Bank of England or Government can push them much lower without becoming a direct loss making lender.  I also can’t see earnings rising at inflation or above for some time given we are still one of the highest paid countries in a now globalised world.  So from here at best I can see rates remaining low, which may allow house prices to rise at a rate between zero and less than inflation earnings increases.  I can’t even see it matching earnings increases over the medium term because the real costs to live (food, water, heating) are rising at a rate greater than earnings which when coupled with the fiscal drag we have today will result in less and less free money to spend on shelter.

So can house prices go lower?  Let’s look at house value to answer that one.

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 the 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 6.9.  While still being some way off the credit fuelled peak value 8.3 we are also still far from the 4.6 seen in January 2000.

Graph of Real Nationwide Historical House Prices and the Housing PE Ratio
Click to enlarge

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.

Long Run Graph of the Housing PE Ratio
Click to enlarge

So can house prices go lower?  Absolutely.  All it would take is the market to decide it’s time for interest rates to rise.

In the interests of full disclosure I must highlight that I remain out of the UK property market.  This is simply because I believe the market is overvalued and I try not to buy over valued assets.

As always DYOR.


  • Arithmetic Mean.  This is more generally called the Mean or Average.  It is simply the sum of a series of values divided by the number of values.
  • Geometric Mean.  This is a little more confusing but can be calculated by taking the log of a series of values, then Averaging these values and then converting back to a base 10 number.  Sounds confusing.   Instead, let’s think about why we might use a Geometric Mean for House Prices.  In simple terms a Geometric Mean tends to dampen the effect of very high or low values which could bias the Average.  In the house price case we have a very long series of high house prices and so this statistic will dampen that affect.


  1. Why do you say "This shows that today we are still nowhere near fair value" when we are below the blue trend line?

    Also is it right to compare earnings with utility rises by percent? Isn't your 0.5% earnings and 10% utilities a bit misleading? Say someone earns £25k and gets 0.5% that's £125 a year minus stoppages. If their Electricity bill is £500 then they can afford the £50 and buy more electricity. Though of course other living costs are also going up in price.

    Disclosure.... I am also out of the UK property market but do not see nominal house prices dropping because the government didn't want it before and will want it even less when they have to pay for losses under HTB2. It's all about lending and 95% mortgages are back to anyone with a pulse. It will be borrowing to buy houses using pensions next.

    1. The blue trend line corresponds to House Prices and not Value however it is still good thought provoking question. Using the longest run data for Value (the red line - House Price/LNMQ), the denominator of which stopped being published in July 2010, the average Price per unit of Earnings is £934. Extrapolating and today that value is approximately £1,142. Just on that measure it implies an over valuation of 22% compared with long run mean. When I then consider we have just been through one of the biggest credit induced booms in history I can't help but feel it's possibly even greater than that.

      "Also is it right to compare earnings with utility rises by percent?" I think we will both agree that in the UK savings rates are very low on average meaning nearly all disposable is spent. The question becomes how much of that spend is discretionary and so subject to these greater than reported inflation increases. I have no data to support it on hand (if any one does please feel free to jump in) but for the average person on the street I would expect it's a fairly small percentage. If most of your disposable income is going on "essentials" I don't think it's misleading.

      Of course if your a hardcore follower who like me is saving around 60% of gross earnings then you're probably right. It makes some difference but not as much as implied (look back to my Q3 update and it is definitely making some difference). The question is how many of those types are there out there in the UK? Given the levels of debt in this country I'd suggest not many but I would be very happy to be proved wrong as that would imply the message is getting out.

  2. Here's my question - why have all your graphs except the last one start at 2000 when your last graph shows the last bull run began in 1997? Surely that has to be the starting point.

    1. Sorry start at 2003 or at best 2000?

      Is it the LTCM reason that you only have data going back that far?

    2. Its driven by a few things:
      - In this post I was looking at whether we had reached a new high as the MSM were stating. I was therefore trying to stay zoomed in on that.
      - Dataset lengths available to me. For example Rightmove started in 2002 and KAB9 started in 2000.
      - I had these datasets available to me from some previous work. I didn't even think that I might be challenged on the period.

      It does however reinforce the old saying that there are lies, damn lies and statistics. If you have enough time you can manipulate a statistic to say anything. In this instance I don't think that is the case but if you think differently please do highlight why you think the period is inappropriate? This is because I am ever conscious that our natural human behaviour can induce biases that we don't even know we have and that's one of the reasons I run this site. To get that opinion that's on the other side of the fence.

  3. Great analysis. Thanks.

    UK journalism really does get on my nerves at the moment.

    Keeping up with world affairs is such an important thing to do. However, journalists seem to have become so lazy and so determined to print sensationalist headlines, that its becoming almost detrimental to read them as a source of fact, but rather their only purpose is entertainment.

    We usually see one influential paper print a headline and the others follow suit, whether the statistics agree or not.

    BBC Radio 4's "More or Less: Behind the Stats" with Tim Harford does a good job of showing how the papers misuse statistics to make their stories more appealing.

    A good one recently was a report which was widely reports as "300 under 11s are admitted to hospital for drinking too much alcohol", whereas the real fact was "300 under 11s were admitted to hospital for alcohol related causes" which was obtained from a search in hospital databases for the admittance cause including the words alcohol or drunk. Therefore, "10 year old, severe injury to right hand because drunk father dropped a knife on her hand while making a midnight jam sandwich" is included in the paper's report as "10 year old in hospital after getting as drunk as a skunk". Its really disappointing!

    However, I greatly appreciate your thorough analysis above. Added to favourites!!

    1. Hi moneystepper.

      Glad the analysis gave you some added value. Personally, my stance is that the reporting from the MSM has become so biased and of poor quality that I hardly engage any more. Whenever I do engage the first thing I ask myself is if this report is just a thinly veiled advertisement from a VI. I'm sometimes shocked at how often I answer yes to that question.

      I no longer buy newspapers and really don't watch much TV news any more. I do listen to the news headlines on the radio a couple of times a day and spend 5 mins checking the BBC headlines online. This helps me identify what I want to be researching to make my own mind up (much like this article).


  4. An observaton if I may: One could argue that equities (and bonds) are overvalued (Shiller CAPE/Tobin etc etc) and yet you're heavily investing therein and planning your retirement thereupon. I'd agree (UK wide) houses don't appear 'cheap' (assuming historical mean reversions which may not re-occur or may take a generation or more to occur - IRs for example) but that doesn't mean one shouldn't buy one to live in today, any less than one should own equities or bonds today.

    1. Hi Anon

      I agree. Nowhere in this post do I say somebody shouldn't be buying a house. We are all in different stages of life and all have different needs/opinions. Unlike our politicians and the MSM I do however always try and be transparent by providing full disclosure including my situation and what I am thinking. I feel this is right because it enables people to see my situation and decide if and how I am a VI. They can then use that knowledge when they are doing their own research.

      I agree that Shiller is suggesting over valuation in some of the equity markets I track. That's why my mechanical investing strategy is forcing me to be underweight those equity markets. If you haven't found those articles click on the tabs below the banner entitled "Latest Data / Charts" and "My Low Charge Portfolio". The relevant posts should hopefully be obvious from there.


  5. I'm sorry but I completely disagree with most of this analysis. To raise a few points at random:

    - It is pointless to average out completely different markets like London and the declining North because you end up with a meaningless average
    - London is being used as a safe haven by overseas investors so average earnings, inflation, etc are irrelevant for those buyers
    - You ask where the money is coming from - how about equity built up by earlier buyers, especially those moving out of London, also bank of mum & dad etc
    - General inflation is irrelevant because some banks will still lend 5x joint salaries of a couple regardless
    - What about supply/demand imbalance? We have immigration, baby boom etc and a failure to build enough properties over many years. This is partly due to green belts and height restrictions but also accumulation of buy-to-let empires over many years is taking properties out of circulation

    From my personal experience of having missed out on several houses recently I can tell you that in at least one City near London most houses (not flats) are going for 15%+ over those asking prices on Rightmove. It wouldn't surprise me to see 25% year on year price inflation here.

    One thing I do agree is that many buyers, especially first timers will borrow the maximum they can afford and then pay that amount for any house they fall in love with. Unscrupulous estate agents (and sellers) can certainly take advantage of that in a sellers' market.

  6. At some point prices will get so high that BTL emperors will surely cash in by selling. Unless they all plan to avoid CGT by hanging on until they die.

  7. @ dearieme

    Since indexation allowance was abolished you're looking at 28% tax for a higher rate tax payer so you'd only get 72% of the proceeds (plus a bit more for your allowance).

    Alternatively you can remortgage and take out 75% minus a bit for remortgage fees. In the latter case you keep the asset so benefit from continuing price rises plus you also have the inflation linked revenue stream of rent.

    In this era of it being hard to find good investments, what would you do with the money anyway?

    1. "so benefit from continuing price rises": investing is certainly easier for those people blessed with knowledge of which assets are going to rise in price.

  8. We live in an inflationary economy so the prices of all classes of asset will increase over the long term, which is why it is good to hold assets rather than sell them. This article is about property.