June 29th, 2010 
Emily Young 
Nationwide today suggested the mini house price boom of 2009 and early 2010 has run out of steam. It also published an update of a chart that has attracted plenty of attention in recent years.
The latest house price-to-earnings ratio is a little over 5.5 against a ‘long-term average’ (since 1980) of 4 – that implies prices would need to fall around 27% to be in line with the typical level of the last 30 years.
A bit of history on property ratio views
We looked at the price-to-earnings ratio in February 2009 when I observed that house prices were wildy over-valued against house prices – by 10% on Halifax’s measure of long-term trend, or 38% over a far longer period for trend.
The same conclusion was drawn six months later by ex-MPC member David Blanchflower: 38% over-valued.
And today Ian Cowie of the Telegraph drew a conclusion in relation to first-time buyers: 28% over-valued.
Then, drawing on the relationship between prices and rents (a measure that it says makes more sense than price to earnings), The Economist concluded in January that UK house prices were 29% too high.
In April, my colleage Simon Lambert tackled the ‘it’s different this time’ question. His conclusion and accompanying chart is well worth a look: House prices vs earnings: What next?
Purists will tell you that elasiticity of markets means everything eventually returns to trend. The two problems with all of the above is:
a) How do you find the true trend line? For house prices, do you take the average for the last 30 years (as lenders do), when house prices have been high vs earnings, or a much longer period?
b) How long will it take to return to trend?
While warning house prices were dangerously overvalued last spring I also (luckily) warned that values could easily bounce back in the short-term. And earlier this year my best guess was that low rates should keep on supporting the mini boom.
But of course the elephant in the room is the colossal consumer and governement debts hanging over Britain.
The measures to tackle – spending cuts and tax rises – will erode economic growth and eat away, very slowly, at the factors that suppport house prices: employment and wage growth.
Why I’m buying
House prices remain wildly over-priced against the long-term average – but I just don’t have the patience to wait for the long protracted decline.
I sold to rent in November 2009, mainly due to a necessary town relocation but also with a nod to the sky-high valuations in the property market and on the hope of a correction. Now, with rates unlikely to rise fast any time soon (which would send prices down) and the rental market suddenly tightening in my area (it’s got a fast link to the reinvigorated City), I’ve made the difficult decision as a property bear to hold my breath (and my nose) and buy a house.
It’s somewhere I want to live for the next 30 years. It will need to be – the value of my home will probably dwindle for the next decade – but having rented for nine months, I know that I don’t want the uncertainty of being a tenant and the potential of repeated house moves. I don’t have the patience to wait for the proper crash.
So sorry fellow property bears, like Merryn Somerset Webb of the FT and Money Week (another arch bear), I’m selling out and buying in. For those with the patience to see this through, I wish you luck.
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