There are definite signs in the housing market but some measures are picking up. Is it too early to call upon in the housing market? This is always a difficult call to make because house prices are local, although they are linked in general to a nationwide trend which clearly is still on a downward trajectory.
In this recession, UK is about 15 months behind the US and so we should look to the US to see what we can expect from the future.
Many areas of the US have retrenched drastically in terms of their house prices. Arizona, Nevada, California and Florida have all seen house price slumps of over 40% or 50%. Many other areas of the country have seen 30% plus slides in the value of houses. These are not just isolated cases but entire cities and regions which have had across-the-board slumps of between 1/3 to a half.
We haven’t really seen the magnitude of change in the UK yet that has happened in the US. Currently, the average house price is around £155,000 while the average wage is around £25,000 a year.
This means that the ratio between the average houses and average incomes is still hovering around six. Even in isolation, despite the falls in house prices we have seen, this is still a remarkably high ratio historically.
If we have reached the bottom of house prices it would be the first time in history that they have bottomed out at such a high level in relation to wages.
In addition, their values compared to rents are still very high and one would expect to see a rental yield of between 6% and 8% at the bottom of a house price crash.
Taking these indications into consideration, it is very likely that house prices should have another 30% to fall. This would make a peak to trough decline of between 40% and 50%.
Of course, the size of the boom was incredibly large so the size of the bust in most cases will match. It isn’t inconceivable that house prices could bottom out at around 3 to 3 1/2 times earnings.
Historically, this is where prices have ended up in relation to earnings at the bottom of a property market cycle. If they were to reach this level, it would be in no way out of whack with historical precedent.
In fact, that they didn’t reach this level, it would be the first time in history that a bust has failed to drive levels down this low. If this historical scenario turns out to be the case, the bottom of the housing market would be reached when average prices hit somewhere under £87,500. Look out below.
