Across the US, house prices have collapsed so much that they are now under-valued. That is in stark contrast to most other parts of the world, including Britain, where they haven’t dipped sufficiently to ensure that they are back in line with fundamentals. Over long periods of time, property prices – like equities – move roughly in line with earnings (in the case of stocks, that is profits; in the case of homes, average earnings). This gravitational pull is known as mean-reversion and was brilliantly explained by Robert Shiller in his classic work Irrational Exuberance.
Yet as an excellent note from Ed Stansfield of Capital Economics points out, prices in many countries are still completely detached from reality. <a href="http://www.cityam.com/house-prices">UK house prices</a> are down by 15-16 per cent from their peak but have bounced back since last year (though this recovery appears to be abating, thank goodness). By the fourth quarter of last year, Swedish house prices had more than reversed their earlier 7 per cent drop to reach an all-time high. In Australia, house prices have risen by 15 per cent since early 2009 and are also at an all-time high.
House price to gross average earnings remain between 20 per cent and 40 per cent above their long-run averages. In some cases, the reason is temporary imbalances between supply and demand – in the UK, most homeowners don’t want to sell, pushing up prices. In Australia – which amazingly escaped the recession – employment is 3 per cent higher than in the final quarter of 2007. In all cases, low interest rates have cut repossessions and improved affordability, lulling homeowners into a false sense of security.
In what must be the most depressing series of statistics I have seen in a long time, the house price falls that would be required to return the house price to earnings ratio to its long-run average is eye-wateringly massive in most countries. In the UK, prices would have to collapse by 28 per cent (or of course wages would have to go up by the same amount in nominal terms). In Spain it is 30 per cent, in France 26 per cent, in Sweden 24 per cent, in Ireland 22 per cent, in the Netherlands 38 per cent and in Australia 40 per cent. Truly horrible.
TIME FOR A CHANGE
SO the City has fallen out of love with Labour and Gordon Brown. Our newly launched City A.M./PHI panel – which we polled by email for the first time yesterday – is unequivocal: 73 per cent believe that a Tory government would be best for the UK economy, with just 10 per cent supporting a Labour government. Around 9 per cent would prefer a hung parliament.
The launch of this panel is a major milestone for City A.M. and for our mission to inform, advise, entertain and stand up for London’s business community; its growing membership (sign up at www.cityam.com/panel) represents a broad cross-section of our readership. Until now, nobody has ever sought to poll London’s capitalist classes, largely because no one was interested. Do read the full results and all the demographic data on page 16.