The great house price debate!

In English it is called a complex equivalence. It’s when two statements are joined in your mind but not in reality – it’s as though someone has said ” which means that” in between the two sentences. Salesmen use it all the time when trying to sell the benefits will feature of some new car or the like. The rest of us just use it continually without noticing. “ You’re not smiling.” (which means that) “You’re not enjoying yourself”. No – I’m simply not smiling!

There’s plenty of this about in the discussions on the economy that you can hear about at the moment. Particularly where house prices are concerned, because they seemed to be the key barometer of how we feel about our personal wealth in this country.

Today’s announcement that the housing market has seen a bit of a pickup is a case in point. The Royal Institution of Chartered Surveyors has reported that buyer enquiries have risen for the seventh month in a row. Apparently, this means that house prices have at worst bottomed out, and may even be rising! Whereas I simply think that people think that the market is coming to a bottom and are looking for a bargain.

But if we look at historical measures of affordability, even this looks bizarrely optimistic. Historically, average earnings and house prices have a correlation – 3 ½ times average earnings equals average house prices. Currently, even after the last 18 months of price drops, it is nearer for a half times average earnings. So on that basis, a further drop is necessary just to make houses affordable again. Given that the UK economy is in recession, and that unemployment is still rising and will do so for the foreseeable future – at the least the rest of this year – I cannot see that the bottom has been reached yet.
There is another measure as well – apparently charts are available going back to before the 1800 is showing that house price cycles go in 18 year patterns. 14 years of growth and four years of falling prices. You work it out – how many years of falling prices have we had so far?

I also don’t follow the logic of people who want to buy before they are certain that the bottom has been reached. They argue that if they haven’t quite reached the bottom then at least they’ve bought the property they want at a reasonable price. However they can only judge that in hindsight once the bottom has been reached. They don’t know when they buy where the bottom is yet. They could be buying still quite expensively. Surely it is better to wait until a continual upturn has been observed, and buy then, knowing that they are away from the bottom? It makes much more sense to me.

But what are your views – there’s a survey on this page, so please take it and let me know your thoughts. Do you think house prices are going to go up, stabilise or go down in the near future?