19 August 2013

Forever Blowing Bubbles

From time to time it is good to look at the Nationwide's index of house prices to see how overvalued housing still is. I tend to follow the ratio of prices to earnings for first time buyers. This time I have put the long run average on the chart. The long run average for house prices is 3.4 times average earnings for first time buyers.
Source: Nationwide
I'm not sure that the long run average is the right measure of where a sustainable ratio should be. About 18 months ago when I looked at these figures the long run average was 3.3 times. The longer prices remain high the higher the long run average becomes. I once used a trend line from 1983 to 2003 and projected it forward. This gave a flat trend close to 2.9 times.

I previously pointed out the irresponsibility of a government boosting house prices in these conditions. It is pleasing to see that this view is widely shared, at least outside the government's supporters.

I worry more about the consequences of the next fall in prices. The best we can hope for is that house prices stagnate while earnings catch up. Unfortunately at present the opposite seems to be happening.

Update: small correction to improve clarity.

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