A false dawn for house prices

Hudges Actually, the multiples of average earnings have no effect on their own - they are merely a poor proxy for the actual factor that matters - affordability. Very few people think of buying a house in terms of a multiple of their wages, instead they concentrate on the percentage of takehome pay the mortgage will cost, the deposit they will require, what they are willing to sacrifice to buy said house, and the cost of the alternative - renting or living in a smaller / worse house. Average earnings multiples only reflect one and a half of those variables, at best. Also, the mean on that graph is irrelevant - the trend is far more important. I don't remember where it was done, but another site had taken the source data from that graph and done a trend analysis on it. The result, which can almost be seen on the graph, was a definite uptrend from around 3.2 in the 50s and 60s to around 3.8 now. Which would suggest that any short term falls are merely part of an overall uptrend in the market. And the other factors you list as affecting the UK will affect all other nations as well, some of them by much more. Ireland and Iceland's governments are now pretty much bankrupt; China, Brazil and Russia already have inflation around 10% or higher, and India is likely to join them once the crisis eases; and Russia, the largest gas and oil producer in the world, could run out of electricity capacity by 2011. And these are all nations that already contribute significantly to UK immigration. The better managed ones such as France tend to be places UK citizens want to emigrate to, which will make it harder for them to do so, further increasing overpopulation in the UK. "My view is that the country needs policies that stimulate the economy to encourage exports and wealth creation." Didn't Japan try that in the 1980s? And Germany in the 1990s? Didn't work out too well for them in the end - Germany's economy is shrinking twice as fast as the UK's, and Japan's hasn't grown properly for 18 years. As for your final question, there is no such thing as a good housing market, because there is no such thing as a housing market. Each street / block of flats / house can only be judged individually, as it is a unique good with a unique set of circumstances. The housing market is just a euphemism people use to try and understand why prices behave as they do, and turn something complicated into something simple. But I guess to the extent that there is a market for housing, it is a good market when enough homes are being built to supply the number of people who want them. If that was happening, then prices would rise with inflation and houses would be traded much more freely as there would be no market imbalances. Indeed, in an efficient market high prices always resolve themselves, as they encourage more people to produce goods as the price exceeds the cost of production. Sadly, that doesn't happen in the UK because planning laws stop the market from functioning efficiently.

The trends suggest that multiples of Average Earnings do have a major impact, but as people have mentioned, there are other factors. http://www.housepricecrash.co.uk/graphs-average-house-price-to-earnings-ratio.php This shows a mean of 3.4% since the 1950s. More recently the equivalent figure for first time buyers rations has been 3.3% since 1983. These would suggest that there are still further falls in the pipeline. Other factors that could have medium to longer term impact are the general economic stability of the UK as a whole. The present Government has put the country into so much debt that tax levels will have to rise significantly. Inflation will undoubtdly rise when the impact of the financial easing measures come into effect and with it interest rates. Further oil price shocks are also likely to affect things. The electricity supply generating capacity in the country is not being replaced sufficiently quickly and it is suggested that there will be power cuts by 2016. These are all factors that may lead to less influx of people to the UK, less housing demand, and thus lower prices. My view is that the country needs policies that stimulate the economy to encourage exports and wealth creation. Rising property prices do not create wealth for the country, just increases the divide of wealth between the population of the country. Increasing that divide can only lead to instability and potential problems. Finally, can someone answer a question? What is a good housing market? Is it one where plenty of homes are being sold or is it where prices are rising? 

Johnny5 Actually, those figures do look about right to me, if you consider the whole population. My parents earn three times as much as me, but their mortgage is two thirds of the amount of mine - that's why the UK as a whole spends such a low amount of GDP on housing. First time buyers or people moving up the chain in the UK will pay more than their equivalent renters in Germany, but once you're settled down and get the mortgage mostly paid off, you'll be paying much less. From memory, and another of Cliff's articles, I think the total value of housing in the UK is around £5 trillion, with only £1 trillion of that secured with mortgages. As such, even if the mortgage rate is 6%, the UK will only have total mortgage costs of around £ 60 billion. In contrast, if the total value of Germany's housing is around the same (cheaper houses but more of them), and around 60% (£3 trillion) of them are rented, even at a rental rate of 4%, that's a total cost of £120 billion. And that's 60% of the German market versus around 70% of the UK market as homeowners. I appreciate that those are back of the envelope calculations, and Germany has a larger GDP, but I think that's the root cause of the difference. As for nickpike's claim about 20 years plus - I just ignored that one to be honest! He's effectively proposing 0.75% inflation over the next twenty years. Even if that does happen for the UK, the much higher levels of inflation in the BRIC countries will make it much easier for people there to buy into the UK market, much like they have done throughout the whole of the last boom. And how likely is it to happen in the UK, given that the last inflation report from the BofE indicated that current market expectations of interest rates are too low until mid 2012?!