“London house pricing 50% overvalued sparking correction fears”
So screamed a recent headline in the Daily Telegraph, which was then quickly copied by various other newspapers.
‘S&P Global Ratings, part of S&P Global, used long-term average prices of properties and compared them with income data for its calculations.
Alastair Bigley, a researcher for the agency, warned that prices were likely to fall.
“A combination of low rates, the stamp duty holiday and excess savings amid the pandemic have driven property prices higher, particularly in London and the South East where overvaluation relative to income over the long-term is as much as 50pc,” he said.’
Hell’s teeth, we should all run for the hills!
Or should we?
Should you use London’s average house price to earnings ratio as an indicator?
As I have highlighted in the numerous talks I give for private banks, solicitors and tax advisers, the London average house price to earnings ratio is an incredibly bad indicator for a crash when used alone. I won’t go into the details of it here but let me just give you an example to highlight what has happened historically with regards to the London house prices average:
In 2021 you needed a minimum of £125m to feature in the Sunday Times Rich List. 23 years ago, one “only” required £15m. Meanwhile, according to Statista; the median annual earnings for full-time employees in the United Kingdom has risen from c.£16,500 to c. £32,285 and the FTSE was at 6,163 and is now roughly 7,400.
So, over that 23 year period the median annual earnings has risen by almost 100%, the FTSE has risen c. 20%, the UK’s richest people have increased their wealth by 700% and UK and London house pricing has increased by several multiples (that multiple depending on the area) making the London average house price significantly more expensive than it was in recent years..
I don’t have the exact figures for the global rich list but their wealth has increased by even more. So, taking all this into consideration, does looking at the London house pricing to earnings ratio seem like a useful indicator?
Clearly not. Yes, when the market crashes the ratio will be high but there are far more examples of it being high and the market not paying the slightest bit of notice and that is because the London house pricing is driven by far bigger forces. Even S&P acknowledges this although rather ignores the point when it mentions “excess savings”.
But there are much bigger forces at play which can influence the London house prices average. For example, if over the last decade and more you have read my research or heard me talk about the property cycle, you will know that I have said that banking regulations would be relaxed in the second half of the cycle, which will allow more credit into the system which will massively boost the house prices in London.
There have been various signs of this including:
- Boris Johnson’s Generation Buy scheme
- Credit Suisse’s Collataralised Loan Obligation last November
And recently, the UK’s Financial Conduct Authority started a formal consultation on its proposal to withdraw mandatory stress testing of affordability when a borrower applies for a mortgage.
This is nothing new. It is all part of the property cycle which is predictable because it has been repeating for centuries. Yes, centuries. not just since World War II as many mistakenly believe.
Hmmm…, so would it be unreasonable to say that giving easier access to credit might drive the London average house price significantly higher especially when one considers that there are still trillions of pounds, dollars, euros, etc. sitting idle in people’s bank accounts?
And you don’t have to believe me. Just ask your bankers what they are seeing and they will tell you that there is an extraordinary amount of money out there. “A World Awash With Money” was a report by Bain and Co in 2012 which described a “Capital Superabundance” which would see global capital balloon to over a quadrillion dollars by 2025. They have been absolutely spot on so far.
Does this sound like an environment in which you want to be long on cash and short on assets, especially property?
No, I don’t think so either. Fortunately, the press headlines don’t mention this side of the equation, so we can help our clients while the masses follow the headlines in the wrong direction.
If you would like to know more, simply email me or you can call 02034578855 (+442034578855 from outside the UK).
