From: Daytona 
Newsgroups: uk.finance
Subject: Re: BofE says brace for house price crash
Date: Thu, 16 Sep 2004 15:21:18 +0100

Here's another article that I've stumbled across. It calculates that
UK house prices need to fall by 25% over 4 years to get back to
average house prices to earnings and house prices to rents ratios


"Global house prices 

Hair-raising

Jun 3rd 2004 
From The Economist print edition


Australia's housing bubble could be the first to burst. It won't be
the last

SEEKING to cut through the tangle of statistical measures of Britain's
housing market, the economics editor of The Economist turned to her
hairdresser. Last year, he was convinced that “buy to let” was a sure
way to make money. Today, finding it harder to cover his costs with
rents, he has decided to sell. A sign that the residential-property
boom could soon turn to bust? Maybe. Figures, not just anecdote, also
suggest that in Britain and elsewhere, housing markets look ready to
fall.

 
 
 

 
Two years ago, we launched a set of house-price indicators, backdated
to 1975, for 13 developed economies. In our latest quarterly update we
have added three more countries: New Zealand, Denmark and Switzerland.
Our indicators, based on data from estate agents, lenders and official
sources, show that house prices are slowing in several economies that
had been looking frothy. In America average house prices rose by only
1% in the first quarter of this year, the smallest quarterly increase
for six years. Prices fell in 39 of the 220 metropolitan areas
covered. Even so, prices were still 7.7% higher than a year before
(see table). California saw the biggest gains, with prices up by 18%
in Los Angeles. But higher mortgage rates may be starting to bite: new
home sales fell by 12% in April, the biggest drop for ten years. 

The average house price in Britain, as measured by the Office of the
Deputy Prime Minister (ODPM), rose by 7.8% in the year to March, down
from an increase of 25% at the end of 2002. The ODPM index weights
price changes by the value of homes in different parts of the country
and is considered to be a more accurate measure than other indices
which currently show prices rising much more rapidly. 

Australia's housing market has weakened. According to official data,
average house prices kept rising in the first quarter, leaving them
18% higher than a year before. However, figures collected by
Australian Property Monitors, which are more timely because they are
based on prices when contracts are signed rather than at settlement,
suggest that home prices tumbled by an average of 8% in Sydney and by
13% in Melbourne in the first quarter. Anecdotal evidence suggests
that the slide has continued since then. Last weekend in Sydney only
one-third of properties put up for auction—the most common method of
sale in Australia—were sold, signalling that prices have farther to
fall.

The drop in house prices in Australian cities undermines a popular
argument heard in Britain and America that even if house prices do
look frothy, they are unlikely to fall unless there is a big rise in
interest rates or a jump in unemployment. Neither has been needed in
Australia. Interest rates have risen by only half a percentage point
during the past year, to 5.25%—less than half the level during the
previous housing downturn in 1990. Meanwhile, unemployment is close to
a 20-year low. 

Instead, the main reason for the falls in Sydney and Melbourne seems
to be that first-time buyers have been priced out of the market, while
demand from buy-to-let investors has dried up as net rental yields
have fallen below mortgage rates. This holds lessons for Britain,
where the number of first-timers has also slumped and buying-to-let is
looking less profitable.

However, not all markets are slowing down. House prices in New Zealand
surged by 22% in the year to the first quarter, the biggest increase
in any of the countries we track. House prices have also risen at
double-digit rates in France, Italy, Spain and Ireland in the past
year. 

House prices have outpaced inflation everywhere in recent years except
Germany and Japan, where prices continue to fall. Among our 16
countries, prices are now at record levels in relation to average
wages and rents in America, Australia, Britain, Ireland, the
Netherlands, New Zealand and Spain. The ratios of prices to incomes
exceed their averages in the past 30 years by between 25% and 60%. A
return to the long-term average could be brought about either by a
fall in house prices or by a rise in wages and rents. The snag is that
with wages in most countries increasing by only 3-4% a year, it would
take years for inflation to erode real house prices to normal levels. 

 
 
 

 
The chart to the right shows by how much prices would need to fall to
get back to their long-term average, assuming that the decline takes
place over four years and that wages rise at a pace similar to that in
the recent past. House prices would need to fall by 10% in America, by
15% in New Zealand and by 20-30% in the other five countries.

Need prices fall so far? Maybe not: lower real interest rates than in
the past would justify an increase in the long-term ratio of house
prices to wages and rents, and would therefore require a smaller fall
in prices. On the other hand, when past housing booms have turned to
bust, prices have typically undershot their average by 10% or more."