House prices seen as still too high

UK house prices are still too high, according to many economists, although few expect them to fall sharply this year.

Of the 44 economists who said houses were overvalued, compared with 26 who said they were not, most focused on whether they were within the reach of ordinary people.

“Possibly the most worrisome statistic on the housing market is that affordability is still worse than average despite interest rates being at their lowest for more than 300 years,” said George Buckley at Deutsche Bank. “If interest rates were ever to return to ‘normal’, we would soon realise how overvalued the housing market actually is. That does appear to be some time off, however.”

David Blanchflower, a former member of the Bank of England’s monetary policy committee, noted average prices were still about 4.5 times average earnings compared with a long-term average of about 3.5 times. “My guess would be that nominal house prices will have to fall by a further 15 per cent or so,” he said. Sir Samuel Brittan of the Financial Times said prices were 10-20 per cent too high.

However, a large proportion of this group thought the status quo would prevail for some time. Most commonly, they said this was because the supply of housing was not sufficient to meet demand. Household formation has been running at about twice the pace of supply of new housing.

“The shortage in housing supply over the past decade has meant that prices are unlikely to return to levels where the medium-paid working family can afford one,” said Keith Wade at Schroders. “This trend has been exacerbated by the influx of foreign money that is using UK property, particularly in London, as safe havens to store their wealth.”

Many respondents agreed with Professor John Muellbauer of the University of Oxford, who said house prices would remain fairly static in cash terms, as they have for several years, but would continue to fall gently in “real terms” after inflation was stripped out.

However, 26 respondents said house prices were not too high. Kate Barker, another former MPC member and author of the 2004 Barker review on housing for the government, said prices were 30 per cent lower in real terms from their peak and 25 per cent lower compared with average earnings. “Housing is difficult to access for first-time buyers due to the reduced supply of mortgages at higher loan-to-value ratios, but this does not necessarily imply prices are ‘too high’,” she said.

Others said prices would already have fallen if housing was overvalued. “The circumstances of recent years were uniquely favourable to deflating a bubble if it were in place, but the price correction has been relatively mild,” said Malcolm Barr at JPMorgan. “We are learning that the scarcity of land value had a lot to do with the move up in home prices, and are not expecting the land supply situation to change very much.”

Some economists were sceptical of any attempts to say what the price of houses should be.

“I always think this is a pretty meaningless concept, in economic terms,” said Ian Plenderleith, another former MPC member. “House prices are what they are and who is to say they should be otherwise and on what grounds?”