Housing market no longer over-valued

Allister Heath
AT this rate, City A.M. will soon be able to ditch the &ldquo;Beating the Blues&rdquo; puff we run every day on our front page. We introduced it during the depth of the recession to emphasise that even though the economy was going to hell in a hand-basket, and life had become truly grim for our readers, some firms were still doing well. <br /><br />But the newsflow has now improved quite noticeably. There are still plenty of depressing stories &ndash; unemployment is still rising, blighting the lives of hundreds of thousands of innocent people &ndash; but it is clear that the technical recession has come to an end and that the economy is picking up at last, albeit haltingly. Today&rsquo;s news from the National Institute of Economic and Social Research, which estimates that GDP troughed in May and that the economy edged up 0.2 per cent in the past three months, provides further confirmation of this.<br /><br />Yet while we should all be relieved by this latest forecast, it would be absurd to be complacent. The path ahead will be difficult and deeply painful. The recovery will be weak; I&rsquo;m predicting a square root shaped recovery, with a sharp upturn at the beginning and the then a lengthy period of near-stagnation as massive tax hikes kick in, state spending is slashed and quantitative easing is eventually reversed, all starting after the election next year. <br /><br />But for now we should focus on one of the most intriguing good news stories of the past few months: the end of the great collapse in house prices. I remember getting scathing emails three months ago when I argued the housing market had turned; but I&rsquo;m more certain than ever that I called this right. House prices are edging up again, albeit on still low transaction numbers. The average house price/earnings ratio is down to 4.36, still slightly above the 1983-2008 average of 4.0 times but well down from the 2007 peak of 5.84. <br /><br />Citigroup&rsquo;s ever-interesting Michael Saunders has crunched all the numbers. He calculates that &ndash; assuming a 100 per cent mortgage, a product which is not exactly easy to find these days &ndash; the payments to buy an average house have halved to &pound;6,700 per year (18.4 per cent of average full time male earnings) from &pound;11,800 (34.3 per cent) in late 2007. This is well below the long-term average of 30 per cent and the lowest since 2002. Needless to say, this is unlikely to last, especially when base rates rise again, but affordability on this measure is excellent at the moment. Property is once again attractive to buy-to-let investors. The average rental yield on flats (5.1 per cent) is now well above the average 2-year fixed mortgage rate (75 per cent loan-to-value), which is 4.46 per cent. It is the highest gap since 2002-03. <br /><br />It&rsquo;s hardly all a bed of roses. The average deposit required of first time buyers is now 25 per cent, compared with a long-term average of 5-10 per cent. The average deposit paid by first-time buyers was worth 103 per cent of income in June, a record high, compared to the long-run average of 20-25 per cent. But the number of 90 per cent-plus loan-to-value mortgages increased in May and June. The number of prime products is up 14 per cent since February. <br /><br />It is imperative that the public doesn&rsquo;t get carried away again with the housing market. But the great bust of 2007-09 seems to have come to an end earlier than many had feared &ndash; and certainly earlier than we deserved.