Is there a new paradigm for UK house prices?
According to the Nationwide Building Society, UK new home prices have risen 3% in the first half of 2010, following a previous flat year. This amounts to an astonishing recovery from the global pessimism that remains in most developed economies. So is it sustainable, and why? Like gold bullion, London realty appears to be a safe haven play in troubled political and economic times. Britain possesses one of the oldest democracies, a tolerance of extremists and, a language that is used globally in business, medicine, computing, movies and music. London specifically, has extensive cultural and leisure facilities and, the world’s busiest international airport. Wealthy Russians and Arabs, concerned Greeks, and many other nationalities, purchase holiday or rental properties in the Capital without due regard to the economic situation in the UK.
Whilst after the 1989 housing bubble burst it took four years for new home prices in the UK to start showing positive gains, recent gains are in line with long term historical performance. Since 1964 UK new home price increases have outperformed US by an average 3.25% annually (in national currencies), however during the same period the pound has fallen an annual average of 1.62% against the dollar. This out-performance may have something to do with relative population density. So there may be some justification to believe that UK home prices can continue to outperform US.
Sources: US Census Bureau: Average Sales Prices of New Homes Sold in United States, Nationwide Building Soc. Price New Houses (UK)
However, when we look at the affordability to nationals of their new homes (measured by the annual differential from the average new home price / GDP / population) justification for continued home price growth in the UK seems less justifiable. As at the end of 2009 UK new home prices were seven times the average gross domestic product per person.
Further source IMF: GDP/capita, current prices.
The battle lines between local and foreign residential house traders in the UK are drawn. Higher taxes, high unemployment, government austerity measures and, lack of credit, are holding back the British, while cash rich foreign buyers continue to invest.
The question is, what do these foreign buyers know that the British don’t?
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8 comments
Interesting to see the chart of US and UK affordability overlaid on each other. One of the key arguments UK housing bulls put forward to justify higher house prices is the fact that its more common for each household to have 2 breadwinners than in the past. Yet this social trend is probably even more advanced in the US, and it hasn't stopped affordability falling back to the previous trough. I wonder if this is because unemployment in the US is much higher?
I have never understood why inflation is a bad thing but asset inflation is a good thing, it isn't it's very bad, it massively incrreases the cost of living and therefore reduces our competitiveness. the ilusion of constantly rising prices drives people to commit an ever larger proportion of their income in order to get on the ladder, because it's always been a good investment in the past. Much of the increase over the last year has been driven by low interest rates and higher multiples, but interest rates won't stay low for ever, and multiples cannot keep increasing.
admittedly the london market might be proped up by the low pound in the short term, but surely it's just a matter of time before that recovers, and anyway, as ee suggests, will that help other parts of the uk ?
cheers k
I agree, there's a similar point made here in this Moneyweek article.
Sterling has fallen 25% in recent years. End of story.
If they want to "invest" in 3 bed semis in Bracknell, then be sure to let us know.......if not, then I suspect that for 99% of the country, the weight of foreign money won't keep the housing market supported. UK house prices in general remain massively over-valued ......and it should be one of the priorities of the new government to pursuade people to invest in productive businesses rather than to invest in dead assets like property. The British have had an extremely unhealthy love-affair with property for the last 30 years - and it really shouldn't be allowed to continue, because it is sucking borrowing capacity out of the rest of the economy.
ee
I'm sure the UK property market remains over-valued, but it is odd looking at European comparisons (at least those which have average or median price information available, as opposed to the more common European metric of €/m2 - centered around €2000/m2).
Average (median for NED) price:
Germany €235k
Ireland €235k
Netherlands €225k
UK €195k (£163k)
I am guessing that the apparent disparity is explained by the much larger rental market in Europe, which tends to be accompanied by house purchase being made at a later age by individuals with (perhaps substantially) above average income.
Figures from www.globalpropertyguide.com (lots of detailed info for, apparently, anywhere in the world)
It just suddenly occurred to me what could be behind the apparent discrepancy in prices in my post #4 above.
At approx €2000/m2, European prices suggest that the average home would be about 115m2 (ca. 1240 sq.ft). Perhaps the nominally lower UK prices are indicative of an average home of about 1050 sq.ft (ca. 98m2), the average Brit having, on average, 15% less living space?
Certainly what I generally see here, compared with the many tiny boxes I used to see before we left the uk (at least comparing new build with new build, and even more so in the case of older properties), provides circumstantial evidence in favour of the theory.
It's hard to tell since UK estate agents seem to be resolutely against using a £/sq.ft metric.
chessfou:
I would have thought that care is needed when making comparisons between countries. Factors like tax rates, quality of life, average incomes etc. For example there are a lot of stealth taxes in the UK, leaving less money over for mortgage interest payments. Also I can think of a lot of places in the UK that are just horrible to live in.
"The question is, what do these foreign buyers know that the British don’t?"
My guess is that the value of the pound is the main reason for UK property looking cheap to foreign investors. It is certainly very undervalued in relation to the Euro. Whilst UK property trends have ALWAYS been up over the medium term. With a rising population and lower new build projects being put on hold due to capital constraints it's just a case of waiting for the next boom IMO