Dad's Army and the housing market | 43
It's not difficult to hear the voice of Private Fraser amidst this
carnage. People are scared. Should they be? The potential for a
fall of up to 30 per cent is largely based around the ratio of house
prices to incomes (see: Chart 2).
Chart 2 (based on the Halifax
measure) shows the long-term house
price to income ratio is currently just
under 6 compared with a long-term
average below 4. If this ratio was to mean
revert to its long-term average (from 6 to
4) there could be a fall in house prices of
around 30 per cent (if all the adjustment
fell on the numerator). But will this ratio
mean revert? And will all the adjustment
fall on the numerator instead of the
denominator?
There are structural reasons (growth
in the number of households, land supply
constraints, lower interest rate
environment etc.) which suggest that this
ratio will have trended upwards over time.
Unfortunately we don't know by how much. The housing
market is overvalued, but just as when any asset market turns, it's
very difficult to look over the precipice and say how far it will fall.
In the last recession UK house prices fell by 13-20 per cent
peak-to-trough (depending on the price index chosen). However,
last time the housing market turned down, the downturn was also
intensified by recession, rising unemployment and the effect of
membership of the European exchange rate mechanism (ERM).
0
1
2
3
4
5
6
7
HP: Y ratio
UK house price to income ratio
CHART 2
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: HBOS
If the economic
slowdown turns into a
recession there could
be a harsh price crash

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