UK House Value vs UK House Affordability – September 2012

Over the past few months I have been exploring what actually drives UK House Prices.  In developing some mechanical non-emotional datasets I’ve come to the conclusion that the driver is actually UK House Affordability.  That said while Affordability drives the housing market I personally only want to buy a house when it is at a sensible Valuation.  Therefore from here on in I intend to monthly monitor two key UK House metrics:

• I will monitor UK House Affordability which will hopefully give me some insight into whether house prices will be increasing or decreasing in the foreseeable future.
• As I remain in rented accommodation and intend to buy when prices are fairly valued I will also monitor UK House Value.  This will hopefully give me a sensible buy point to ensure I don’t lose money on the purchase.

Before we look at the metrics let’s first look at the key pieces of data I am using to assess both Value and Affordability:

• UK Nominal House Prices.  I have consistently been using the Nationwide Historical House Price dataset for a lot of previous analysis and so will stick with it.  August 2012 house prices were reported as £164,729.  Month on month that is an increase of £339 (0.21%).  Year on year sees a decrease of £1,185 (-0.72%).
• UK Real House Prices.  If we account for the devaluation of the £ through inflation (the Retail Prices Index) we see a very different story.  Month on month that nominal increase turns into a decrease of £263 (-0.16%) and year on year that decrease grows to a larger £6,031 (-3.66%).  In real terms prices are now back to those seen in March 2003. 
• 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.  July 2012 see earnings at £471.  Month on month that is an increase of exactly £0.  Year on year the picture is not much better with an increase of £6 (1.27%).  With inflation (the Retail Prices Index) running at 3.2% over the same yearly period 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).  August 2012 saw this reach 4.26% which month on month is an increase of 0.02% and year on year is an increase of 0.16%.  So while the Bank of England holds the Bank Rate at 0.5% out in the real world we are seeing mortgages start to cost more, even if it is happening very slowly. 

The Greater Fool UK House Price Index – August 2012 Update

This is the monthly update of the Greater Fool UK House Price Index.  This is a unique feature which to my knowledge is only available on Retirement Investing Today.  The background to this House Price Index is available here.

Let us first look at the latest prices within the four datasets that are used to build the Index:

• The Rightmove House Price Index.  This index tracks asking prices of properties as they come onto the market.  Asking prices in July were £242,097 which month on month is a fall of 1.7% and year on year is an increase of 2.3%.

• The Halifax House Price Index.  This index is based on buying prices of houses where loan approvals are agreed by Halifax Bank of Scotland.  Sales prices in July were £162,619 which month on month is a fall of 0.4% and year on year is a fall of 1.3%. 

• The Nationwide House Price Index.  This index is based on buying prices of houses where loan approvals are agreed by Nationwide Building Society.  Sales prices in July were £164,389 which month on month is a fall of 0.8% and year on year is a fall of 2.6%. 

• The Land Registry House Price Index.  This contains the house prices for all transactions in England and Wales.  This includes both mortgages (which the Halifax and Nationwide would be included within) and non-mortgages (cash transactions).  Sales prices in June were £161,777 which month on month is an increase of 0.1% and year on year is an increase of 0.9%. 

UK House Affordability – August 2012 Update

 

The Nationwide today announced that nominally the average UK house now costs £164,389 which month on month is a fall of £1,349 or -0.8%.  Year on year the fall is £4,341 or -2.6%.  Nominally this puts prices back to levels last seen in mid 2006.

Looking at the Nationwide Historical House Price dataset in inflation adjusted terms (Chart 1), to account for the devaluation of sterling, it however tells a very different story.  This tells us that year on year real prices are down £9,006 or 5.2%.  By this measure UK house prices are back to levels last seen in May 2003.

Introducing the Greater Fool UK House Price Index

I now track 4 UK house price data sets.  These are:
-    The Rightmove House Price Index.  This index tracks asking prices of properties as they come onto the market.  Rightmove claims their dataset covers over 90% of the market so you would expect it to be pretty accurate in terms of seller’s first expectations of what they will achieve for their property.  The dataset is not seasonally adjusted.
-    The Halifax House Price Index.  This index is based on loan approvals agreed by Halifax Bank of Scotland.  The dataset that I use is the not seasonally adjusted, All Houses, All Buyers set.
-    The Nationwide House Price Index.  This index is based on loan approvals agreed by Nationwide Building Society.  I use the actual Average House Prices presented and so am using a not seasonally adjusted dataset.
-    The Land Registry House Price Index.  This contains the house prices for all transactions in England and Wales.  This includes both mortgages (which the Halifax and Nationwide would be included within) and non-mortgages (cash transactions).

UK House Affordability

For a long time I’ve been saying that houses are overpriced.  This statement keeps my family in rented accommodation as I refuse to buy at these prices.  So while in recent years there has been some nominal reduction in prices, reversion to a sensible mean value stalled in 2009.  This was further reinforced last week when the Nationwide informed us that month on month house prices had increased by 1.1% and year on year had fallen by a negligible 0.7%.

So about now I would normally start to correct the Nationwide House Price Index to account for the devaluation of money through inflation and ratio this with average persons earnings.  I would then come to the same conclusion that I always do.  House prices are overvalued when compared to the long run average.  I’m now starting to think that I am going about this the wrong way.  The average person on the street does not analyse data and look at what house prices should be.  The average person on the street instead knows the price of everything and the value of nothing.  Instead, I’m starting to come to the realisation that what is driving this market is not house prices but simply house affordability.  Not how much is this house worth, but instead can I today (no thinking of future interest rates) borrow enough money to buy this over priced piece of bricks and mortar.

So what drives affordability?  I believe the major drivers are two things:

• How much a person earns, and
• How much of these earnings have to go to make interest payments today

Is Brisbane Cooling – Australian Property Market – November 2010 Update

The Australian Bureau of Statistics (ABS) in November published both its House Price Index and its Average Weekly Earnings Index. Let’s therefore have a look if the country which both avoided recession and seems to have a Central Bank that is interested in controlling inflation but which to me looks like it has a bubble of a property market is still as bullish. I say has an interest in controlling inflation. The RBA has been steadily raising its cash target rate over the last year and a half to 4.75%. This is in stark contrast to the Bank of England’s 0.5% who as I’ve described before has no interest in sticking to their inflation remit with inflation now above target for about 40 of the last 50 months. Regular readers of course know that I keep a close eye on Australia as it is still a potential “retirement” location for me even if £1 today only buys a poorly $1.6199.

How long until a house can be bought for 100 ounces of gold?

For a long time I’ve been saying that houses are overpriced. This keeps my family in rented accommodation as I refuse to buy at these prices. Instead I now watch what looks to be the early beginnings of an unravelling housing market from the sidelines. My last UK house price update was here.  Additionally, as I mentioned yesterday while gold is reaching new highs in nominal terms when prices in US Dollars it is not at new highs when priced in British Pounds although admittedly it is close. However, it is nowhere near new highs when priced in real (inflation adjusted) terms and so in my humble opinion still has plenty of upside potential if history is anything to go by.

Look further than the press releases – UK Property Market – August 2010 Update

If you were reading the papers over the last few days you will have probably seen the house price data from the Nationwide reported on. This will have been taken straight from their press release and I’m sure monthly changes of -0.9% will have been mentioned. I however prefer to analyse the raw data as the figures presented to the press are seasonally adjusted. The actual figures are worse than that reported. In July 2010 prices were £169,347 and in August they are now £166,507. That is a fall of 1.7% in a single month with the annual change now at +3.9%. This is now 2 months in a row that we have seen price falls. This is all shown in my 1st chart today.

The Boom Continues – Australian Property Market – August 2010 Update

With the Australian Bureau of Statistics (ABS) publishing its House Price Index on the 04 August and its Average Weekly Earnings Index yesterday I can again look at affordability of Australian Property. Of course regular readers will now that I have an interest in Australia as with a fair wind 6 years from now it could be a “retirement” location for me.

Where is the summer rush – UK property market – July 2010 Update

It’s at this time of year that I thought it was a tradition for the British people to head out to the Real Estate Agents and start bidding up the prices of already over priced housing. This summer though it’s starting to look like that might not happen. Even the new coalition government don’t seem keen to ramp up property and property prices. Of course they are acknowledging that the country no longer has any money however the previous government seemed to always find some way to ramp prices and keep the plates balanced and spinning. This month has seen both prices and mortgage approvals turn down. Who knows if this continues for a couple of years maybe we might even get to the point where instead of the government forcing builders to build “affordable housing” (or as I have eloquently seen these properties referred to elsewhere, slave boxes) instead maybe we might just get housing that is affordable. What a novel idea.

Houses are still overvalued - UK property market – July 2010 Update

The Economist dated July 10th to 16th 2010 has run a very interesting article entitled “Froth and stagnation – House prices in parts of Asia continue to soar, despite efforts to slow them”. As part of this article they present a table showing a list of countries and detail whether according to “The economist house price indicators” houses are under or overvalued. As regular readers will know I am very interested in UK and Australian house prices however let’s have a look at the list from most over valued to most undervalued first:

UK Property Market – May 2010 Update

David Cameron, George Osborne and others are I guess as I write this post working hard trying to pull together the emergency budget that will take place on the 22 June 2010. We have already seen in the press plenty of commentary about the possible increases to Capital Gains Tax (CGT) and the effect it may have on property prices, particularly the Buy to Let (BTL) brigade out there. Personally I’m not seeing them doing anything to engineer a crash (or even significant reductions in values). This is for a couple of reasons:

Australian Property Market (Alternate Data) – May 2010 House Price Update

The Brisbane and Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index published by the Australian Bureau of Statistics (ABS) catalogue 6416.0 suits my requirement to track Australian house prices as part of my retirement investing strategy.  It however has a big flaw for me by only publishing the housing data quarterly.

UK Mortgage Rates and Mortgage Approvals – May 2010 Update

Today I present two regular charts that as with last month continue to give me little information on what could be occurring in the housing market. The first shows the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households (not seasonally adjusted) and highlights that for this data set rates remain at near record lows at 4.04% for April 2010 (actual low was 3.82% in April 2009). Compare this with the retail price index (RPI) of 4.4% and the average mortgage is better than free money with a negative real interest rate.

Australian Property Market – May 2010 Update

I intend to keep a close eye on Australian house prices as I build my retirement investing today portfolio. This is because Australia is a very likely retirement possibility (if not sooner) for me. I do this by watching the quarterly releases from the Australian Bureau of Statistics (ABS) which is what the content of today’s post is however on a more regular basis I watch the data coming from RPData with my latest post here.

UK Property Market – April 2010 Update

I am still out of the UK residential property market although today I really am beginning to wonder why. It really is amazing what a government can achieve if they are prepared to sacrifice the country long term to keep a bubble afloat. Today the Nationwide reported that average house prices had risen from £164,519 to £167,802, a monthly rise of £3,283 or 2.0%. On an annualised basis house prices in absolute terms are up by 10.5% and if I look at real (after inflation) returns they are still up by 5.2%.

British Bankers Association reports on mortgage lending levels

The British Bankers Association (BBA) reported on mortgage lending levels for March yesterday. As regular readers will know I blog on mortgage lending levels monthly (last month here) however I use the Bank of England data which is currently only published up until February 2010.

UK Mortgage Rates and Mortgage Approvals – April 2010 Update

Today I present two regular charts that unfortunately give me little information this month about what could be occurring in the housing market. They show the UK markets just treading water for the month. The first shows the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households (not seasonally adjusted) and highlights that for this data set rates remain at near record lows at 4.05% for March 2010 (actual low was 3.82% in April 2009). This is static compared to the previous month.

Australian Property Market (Alternate Data) – February 2010 House Price Update

The Brisbane and Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index published by the Australian Bureau of Statistics (ABS) catalogue 6416.0 suits my requirement to track Australian house prices as part of my retirement investing strategy.  It however seems to have two flaws. Firstly the housing data is only published quarterly and secondly this housing data is then published over a month after the quarter ends.

The government keeps spending our taxes to inflate house prices

I am yet to buy a house as I believe that house prices are still overvalued. I try and demonstrate this monthly with the house affordability ratios that I present. This current government however seems intent on using our taxes to prop up this property market bubble. This offends me because my (and your) taxes are being used against me to keep me out of the market and also as an electioneering tool.