Thursday, November 13, 2008

How low can they go?

Two bubbles, two crashes; however, the New Labour bubble went much further than the Tory bubble, at least in terms of housing afforability.

During the last bubble, house prices as a ratio of average earnings, hit a breathtaking high of 7.5. Even with a 15 percent decline in house prices, today the ratio remains over 6. In fact, it is still higher than the peak recording during the 1980s boom.

I think I can speak for everyone when I say that we all think that this ratio remains way too high and that it is likely to fall to somwhere between 3.5 and 4. The question is how will it fall; will it be through rising incomes or falling house prices?

With the UK now in recession, we can discount a rising incomes scenario. So brace yourselves for another 15 percent fall in house prices during the next 12 months.


  1. I'm expecting falling incomes too, which means a 4.0 in 2009 is lower (in real terms) than a 4.0 in 1999. That massive hosing a money into public sector headcount will reverse, as will the employment gains, and of course City bonuses only have one direction to go.

  2. What NVM says.

    Alice, what I like especially about your charts, is when I click them to enlarge they fill the screen exactly. How do you set it up to do this?

  3. The market will collapse when the BTL brigade rush for the exit.
    Sellers in general are still in denial that propery could ever go down, so the 15% drop is only the start.
    When they can no longer subsidise the rental income to pay the mortgage and LTV ratios go up, then it will tank very quickly!

  4. MW

    They don't fit for me. I guess you and Alice are exactly the same size*.

    * Screen size of course.