In search of affordable housing | Deloitte UK has been saved
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The price of housing in emerging economies and the West has surged since the financial crisis. According to the Organisation of Economic Cooperation and Development (OECD), house prices in the richer, industrialised nations that make up OECD member states, have risen 26% since the trough in 2009. Emerging market economies have seen far greater increases.
In the UK, house prices have risen 37% since 2009. With incomes rising more slowly housing has become more expensive relative to incomes. For homebuyers this effect has been partially mitigated by very low mortgage rates.
Financial crises generally lead to sharp declines in asset prices, making housing more affordable. It’s been different this time because central banks set out to bolster asset prices in the wake of the global crisis by slashing interest rates and undertaking quantitative easing. Cheap money has worked its magic, lifting the price of housing, equities and bonds across the world.
As a result, house prices in many countries look stretched relative to long-term yardsticks.
A standard measure of affordability compares house prices to rents and to incomes relative to long-term averages. At £226,351 the average UK house is almost eight times median annual earnings. The OECD estimates that UK housing is 29% overvalued against incomes and 41% overvalued against rents.
The US housing appears to offer better value. Despite prices having risen 45% since the trough in 2011, the OECD estimates that the US housing is 2% undervalued against incomes.
Across the 23 industrialised nations studied by the OECD, housing is rated as being most overvalued in New Zealand, Sweden, Australia and Canada. In Australia and New Zealand, which have benefited from Chinese growth, the financial crisis led to a short-lived fall in house prices which was followed by a boom, with prices today 70% and 80% above their 2009 lows. As China’s economy slows, house price inflation in Australia and New Zealand is showing signs of cooling.
For those on the lookout for cheap housing, the countries with the most undervalued markets relative to incomes are Japan, South Korea, Germany and Greece.
Japan’s experience, however, offers a cautionary tale for those who see housing and land as one-way bets. Despite 17 years of quantitative easing land prices in Japan are just one third of their 1991 peak. House prices are also well below the levels prevailing more than 25 years ago. Just because something looks cheap doesn’t mean it’s good value. Japanese housing has, on the OECD measure, been undervalued against incomes for the last 18 years.
Having endured the global economic crisis and their own sovereign debt crises, house prices in Greece, Spain, Italy and Ireland are well below pre-crisis levels. House prices in Greece and Spain are down 43% and 24%, and prices in Italy and Ireland are roughly 20% lower.
According to the OECD, Germany is Europe’s most affordable housing market, with housing 13% undervalued against incomes despite recent price rises. But estimating fair value for housing is no science. Germany’s central bank, far from seeing German housing as undervalued, worries that the market is overheating. In its February report the Bundesbank estimated that housing in German towns and cities is overpriced by between 15% and 30%.
Discussions on housing valuations tend to focus on national house price indices. But within countries prices vary significantly. National affordability figures therefore conceal big differences within countries.
Within the UK, housing in London and the South East is the priciest, with London overvalued by 34% against incomes. That makes London housing as overvalued as the Belgian market which is one of the world’s most expensive.
By contrast, houses in most of the other UK regions are undervalued and affordability is closer to levels in Italy and the US. Indeed, housing in Northern Ireland is more affordable relative to incomes than in Germany, which is Europe’s cheapest national housing market.
The value in the overall German housing market also masks rapid growth in prices in some cities. House prices in Munich more than doubled between 2009 and 2017 and prices in Hamburg rose 70%.
In the US, the tech boom has helped drive a more than doubling of house prices in San Francisco since 2012. Over the same period New York prices rose by just 22%.
House prices in emerging market economies, including China, Brazil, India and Hong Kong, boomed in the wake of the financial crisis. In India rapid growth, strong demand and housing shortages have helped lift house prices by a factor of three since 2010. Growth has been less heady in China but prices have risen by 60% since 2010. Activity has slowed in recent years as the authorities have tried to head off a housing bubble by tightening credit conditions and restricting purchases of second homes.
Housing has ridden a wave of cheap money in the last decade, pushing prices to new highs. Affordability varies within and between countries. But even for homebuyers in regions with stretched valuations, ultra-low financing costs have helped ease the pain.
With the global interest rate cycle starting to turn up, led by the US, the balm of cheap money seems set to retreat. It is hard to see house prices repeating the stellar performance of the last ten years in the next ten.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.