Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

UK House Prices continue to Rise whilst the US Housing Market Slumps

Housing-Market / UK Housing Feb 25, 2007 - 02:24 PM GMT

By: Nadeem_Walayat

Housing-Market

The UK housing market has proved remarkably resilient by notching up a further gain for January of 1.3% (Halifax) , whilst the US Housing market continues to go from bad to worse as the sub prime mortgages time bomb goes off, resulting in a slump that looks set to be the worst since the Great Depression of the 1930's.

The key to the strength of the UK housing market has been the fact that UK house prices have yet to reach the excesses of the early 1990's, in terms of House Price to Earnings to Interest rates ratio. Traditionally, average earnings and house prices have been taken together to produce an affordability ratio, this ratio has clearly in recent years shown itself to be flawed, as UK house prices have not fallen, because this measure has ignored historically low interest rates as a function of earnings and house prices, and therefore a more accurate indicator needs to include interest rates.


UK house prices earnings and interest rates ratio

The indicator accurately shows why house prices have continued to rise, whilst many commentators have year on year announced a crash was imminent, erroernously based solely on earnings to house prices. Despite recent rises in interest rates, UK house prices are nowhere near the unaffordability levels of the early 1990's. The ratio could be expanded to include other variables, such as the level of new build construction, growth in households, employment levels etc. so as to fine-tune the trend. But basically in a simple 3 variable chart the MarketOracle House price ratio is able to explain why house prices have not fallen, and are unlikely to do so despite the slump in house prices in the USA.

The chart shows why 2001 was a great time to buy as world interest rates plummeted, though at the same time, during 2001 there were countless economists suggesting that UK house prices were over valued and expensive. When in fact they were at their most affordable level in a generation, and explained the surge in house price growth which continues right up to the present day.

However, the most recent rise in interest rates to 5.25%, has taken the index out of its comfort range, which suggests a period of consolidation. So it can be said whilst interest rates remain at 5.25% the expectation is for annual house price growth in the region of 5%. For interest rates to really have a big impact on the UK Housing market, it would require interest rates of 6% or more. And today no market commentator, is forecasting a rise to beyond 6%.

Other factors which continue to support the UK housing market are -

UK Money Supply Growth
The growth in UK money supply is running at an extraordinary rate of 14%, its no wonder that the housing market continues to defy gravity and chug along the highs. This excess supply of money is the primary cause of continuing house price inflation, the effect of which is to devalue the value of the £ in your pocket.

The worlds ultimate hedge against inflation is Gold, and in gold terms the price of Houses has actually been falling for some years now, as inflation reappears on the scene. In Jan 2005 the price of an average house was £150,000, and the price of gold in sterling was £204 per ounce. Therefore average houses were valued in 735 ounces of gold. Today with gold at £346 and average house prices at £188000, the average house is worth 543 ounces of gold, a fall of 27%.

Whilst the Bank of England is able to mask the effect of this money supply inflation, then the government can keep printing more and more money to keep the illusion of strong growth continuing. However, at some point a crunch point will occur, when interest rates will be forced higher to reign in price inflation, we have already experienced the start of this in recent months with interest rates being raised to 5.25% in response to CPI hitting 3%.

The UK Economy
The economy continues to produce strong quarter on quarter growth, as Britain benefits from EU expansion, both in terms of the influx of cheap labour and in investment opportunities generating earnings for UK Business. if anything growth rather than slowing, appears to be accelerating with the final figure for 2006 expected to be revised higher to an above trend of 3% and consequently the UK will experience stronger then expected growth during 2007.

Immigration & Lack of Supply
As a consequence of EU expansion, a strong economy and liberal employment laws. There has been a large influx of migrant Labour in to the UK, in excess of 800,000 from the Accession States, this has supported the continuing demand for properties in the buy to let market, which has played an important role in supporting the housing market. This coupled with a lack of supply of new builds means that demand vastly out strips supply, and likely to remain so for the rest of 2007 and into 2008.

Conclusion
The UK housing market looks set to continue to be supported, even at these elevated levels, primarily due to housing still not having reach unaffordable levels experienced in the past, additionally the strong growth in the money supply and continuing immigration continues to support the market.. Even an expected interest rate rise to 5.75% is unlikely to effect the situation significantly. It would require an interest rate hike to well beyond 6%, before we are likely to witness a significant house price decline in the UK. This would be preceded by inflation taking off beyond 3% CPI, and would be associated with a decline in economic activity.

The UK housing market appears to be able to withstand the bursting of the housing bubble in the USA. Despite some similarities with the US, there are still many fundamental differences, which look set to avoid a similar slump in the UK for the remainder of 2007 at least. The expectation is for house prices in the UK to rise between 5% to 7% by the end of 2007.

By Nadeem Walayat

(c) MarketOracle.co.uk 2007

The Market Oracle is a FREE Daily Financial Markets Forecasting & Analysis online publication. We aim to cut through the noise cluttering traditional sources of market analysis and get to the key points of where the markets are at and where they are expected to move to next ! http://www.marketoracle.co.uk


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

John_York
26 Feb 07, 17:22
Re: UK House Prices continue to Rise whilst the US Housing Market Slumps
Its tough to think that the UK can avoid a slump whilst the USA tumbles. So in this case, I would beg to differ from Nadeem.

The UK housing market cannot rally whilst the US goes bust !

I just cannot imagine it ! This year should see a drop, especially if the further 2 rises to 5.75% transpire.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules