Thursday, August 6, 2009

UK house price to earnings ratio converging to long run average

According to the Halifax, the long run price to earnings ratio is almost exactly four. Currently, the ratio is 4.33, falling from an all time high of almost six.

The Halifax ratio was calculated using ₤36,576, which is apparently the national average wage for a man in full time employment. (I will let the obvious sexist implications of using that measure pass). The average house price is estimated to be ₤159,623.

What do you think? Is the crash over, and the boom about to begin? Should we believe the Halifax numbers?


  1. There's also the regional implications of that statistics. My husband has a reasonable job, probably not too far below average for the northwest, and he makes just over £25K. That's 108,250 on a 4.33 multiple, which is about 30K less than the average terrace house where we live, although they're coming down fast.

    So does the average southern male earn £50K a year? (Assuming half of all jobs are in London or the expensive parts of the south).

  2. I don't know where they got the figure of £36,576 from for full time male employment.

    Looking here :-

    The average last year, for males in full time employment, in the peak earning years of 40-49 was £598 per week, or just over 30 grand a year.

    The figure for males in full time employment across all age groups would therefore be lower.

    I would like to hazard a guess what Halifax was doing:-

    They might be using the average male salaries as reported by people applying for a mortgage from them which was subsequently approved.

  3. Thats a pointless graph. If you choose a level of income that's well above true average income then of course its going to look a lot better. If you used median income, which would have more relevance to the man (or woman) in the street, then houses would still be massively over valued. Lies, damn lies and statistics........

  4. I have recently sensed an increasing segmentation of the housing market. I think this overall valuation/earnings ratio is now less useful. We need to look at what's happening by area and price bracket.

  5. I think this chart is missing the obvious.
    GDP is set to fall 30%-40% so wages are set to follow.
    The civil service is drawing up plans to cut Public spending by 30%,which means wages.
    If my memory serves me correct the ratio in the 80's and early 90's was THREE times earnings. This four times earning is relatively new and a direct result of lower average interest rate over the last decade.
    We're coming to the end of a 30 year secular bull market in bonds so the forward projection is for much higher interest rates, therefore the three times ratio will be return.
    This coupled with a dramatic fall in average wages(GDP)will result in a price/earnings ratio of between £45-£55,000 and markets always over shoot on the downside as they do on the upside, but this is going to take a long time to play out.

  6. We need to know the price of the MEDIAN house in relation to MEDIAN earnings-I strongly suspect that the Haliwide et al don't publish these figures as they will probably not flatter to deceive.

  7. Halifax rubbish. If you want to calculate the amount of money aimed at housing you cannot only consider an average of those in employment. You need to calculate the average including the unemployed.
    Obviously, as unemployment increases the average salary of the full time employed may not moderate as much, but those unemployed affect the value of housing.

  8. Sebastian WeetabixAugust 6, 2009 at 12:15 PM

    In all previous busts this ratio has undershot the long term average... plus we haven't got into interest rate increases & higher unemployment yet. This slump has a couple of years to run yet.

  9. I don't know why you put this crap on your blog. Why not get a Lehman brothers stockbroker to give their predictions on the stock market, or maybe see what AIG feels the future of crdit default swaps holds.

    Did it even occur to you that Halifax is the front for HBOS? Do you even know they are up to their eyeballs? Did you expect them to say "property is overvalued by any historical or international comparison you care to make"?

  10. If you get a longer timescale version of this graph you will see an even clearer pattern: The dips are all rather neatly around 3.5 if I recall correctly.

  11. I am coming to the conclusion that only forced selling due to higher unemployment is going to bring down house prices to a 3 or 3.5x earnings ratio. Some news articles are saying the trip point which ends this blip will be around 2.75 million unemployed.

  12. Wonder what the average wage is for male employees at the Halifax?