Where is the cheapest housing?
* House prices in the developed and developing world have risen rapidly since the financial crisis.
* According to the OECD (Organisation for Economic Cooperation and Development), house prices in its developed member nations have risen 32% from their trough in 2009. In the major emerging markets of China and India, the price of housing has risen at a significantly faster pace – Chinese housing is up 43% and Indian housing up 70% over the same period.
* In the UK, house prices have risen by a fifth from their 2009 lows. With wages growing at a slower pace, housing has become more expensive relative to incomes. For homebuyers this effect has been somewhat mitigated by low mortgage rates.
* Historically, financial crises have led to sharp declines in asset prices, making housing more affordable. But this time central banks moved to boost asset prices by slashing interest rates and engaging in quantitative easing. This has supported equity, bond and house prices across the world.
* As a consequence, in several countries, housing looks overvalued and less affordable, despite low interest rates making mortgages cheaper.
* A widely used measure of affordability compares the current ratio of house prices to incomes or rents against their long-term averages. According to the ONS, the median UK house costs £232,500 now, about eight times the median annual earnings. When this ratio is compared against its long-term average, UK housing appears 30% overvalued against incomes, according to the OECD. Similar calculations using rents instead of incomes indicate that UK housing is 38% overvalued against rents.
* By contrast, US housing appears to offer much better value. Despite prices having risen 36% from their trough in 2012, US housing remains 6% undervalued against incomes.
* Across the 24 developed economies tracked by the OECD, housing is most overvalued in New Zealand, Sweden, Australia and Belgium. In New Zealand and Australia, which have benefited heavily from Chinese growth, housing boomed in the post-financial crisis period. House prices in New Zealand are up 64% from their 2009 lows. Australian house prices, which have seen some recent adjustment as Chinese growth slows, are up 30% over that period.
* The most undervalued housing markets in the developed world, relative to incomes, are in South Korea, Japan, Portugal and Greece.
* South Korean housing is undervalued by 40% while Japanese housing is 25% undervalued against incomes. But this should not be seen as a buy signal. Japan’s experience suggests caution. Despite 18 years of quantitative easing house prices in Japan are 36% below their 1991 peak. Japanese housing has, on the OECD measure, been undervalued against incomes for the last 18 years.
* Portugal is Europe’s most affordable housing market. Portuguese house prices are currently 9% lower, on average, than in 2001. Greek housing is also undervalued on the two OECD measures with prices 44% below their pre-crisis peak.
* Surprisingly, the third most affordable European housing market is Germany’s, with housing 5% undervalued against incomes despite recent price rises. But affordability analysis is not an exact science. Major German cities have seen rapid price rises with housing widely believed to be overvalued. A recent report by the IMF estimated housing in Munich to be over 40% overvalued while that in Hannover, Frankfurt and Hamburg overvalued by 25-30%.
* This brings up another aspect of housing affordability analyses. 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 64% against first-time buyers’ incomes, according to data from Nationwide. That makes London housing more overvalued than the New Zealand market which is one of the world’s most expensive. By contrast, housing in Scotland, the North East and Yorkshire and the Humber is much more affordable for first-time buyers, with affordability closer to levels in Spain.
* 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 28%.
* Housing has benefited heavily from the rising tide of cheap money delivered by central banks after the financial crisis. While this has affected affordability, wide variations remain within and between countries and ultra-low financing costs have somewhat helped ease the pain for homebuyers.
* Last summer, with the US Fed continuing rate rises, concerns had risen over how housing markets might respond to a tighter monetary environment. But the current global slowdown and consequent dovish turns by western central banks this year suggest that the cheap money tide has yet to turn.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 1.9% at 7,404 as global equities sold off on an escalation in the trade war between the US and China.
Economics and business
* US President Donald Trump said the US would place a 10% tariff on an additional $300 billion of Chinese goods; Beijing vowed to retaliate
* The US Fed cut interest rates by 25 basis points, its first cut since 2008, on concerns about global growth and weak inflation
* The Fed also announced it was ending the wind down of its balance sheet. By no longer withdrawing liquidity from the system, the Fed is effectively increasing monetary stimulus
* The S&P 500 suffered its biggest one-day fall in two years after Fed Chairman Jerome Powell warned the rate cut was not the start of a prolonged rate cutting cycle
* President Trump criticised the Fed, claiming the interest rate cut was not sufficiently aggressive
* The US labour market continued to add workers at a healthy pace in July, the unemployment rate remained close to a 50-year low and wage growth ticked up to 3.2%
* The Bank of England held interest rates steady and cut its GDP growth forecast for both 2019 and 2020 citing ongoing uncertainty over Brexit
* UK manufacturing activity contracted in July for the third consecutive month and to its lowest level since 2012 as Brexit risks and a slowing global economy weighed on the sector
* UK consumer confidence improved in July despite the Brexit uncertainty, spurred by strong wage growth and low levels of unemployment
* UK construction activity fell for the fifth time in six months and optimism dropped to its lowest level since 2012
* Euro area GDP growth slowed to 0.2% in the second quarter, from 0.4% in the first
* Euro area manufacturing activity contracted in July at the fastest pace since 2012, but retail sales climbed the most since late 2017 in June
* Euro area inflation fell to 1.1% in July, well below the European Central Bank’s 2% target
* The UK’s birth rate fell to a record low 11.1 births per 1,000 population in 2018
* Shadow chancellor John McDonnell announced an incoming Labour government would set up a public enquiry to “reveal and root out corruption” in the UK’s financial sector
* A report by energy consultancy Wood Mackenzie said despite the recent push to increase renewable energy capacity, coal, oil and gas will still likely contribute 85% of the primary global energy supply by 2040
* The London Stock Exchange Group agreed to buy Refinitiv, a data provider, for $27 billion
Brexit and European politics
* Sterling fell to a two-and-a-half-year low against the dollar and the euro, driven by rising investor concern over the likelihood of a no-deal Brexit
* The Liberal Democrats won the Brecon and Radnorshire by-election, cutting Boris Johnson’s working majority to just one
* In a call with Irish prime minister Leo Varadkar, UK prime minister Boris Johnson ruled out a backstop relating to the Irish border under any Brexit scenario
* UK chancellor Sajid Javid announced £2.1 billion in extra funding for no-deal Brexit preparations, bringing total available funding to £6.3 billion
* The UK government is planning to create up to ten free ports across the UK after Brexit, allowing firms to import and then re-export goods outside of the normal tax and customs rules
* BOE governor Mark Carney said a no-deal Brexit would result in an instant shock to the UK economy and a further depreciation of sterling
And finally… French farmers have warned the UK could face a turkey shortage this Christmas. French breeders provide around a quarter of eggs hatched in the UK that go on to become the centre piece of Christmas dinners. A heatwave in the country has resulted in a sharp drop in the number of eggs – cold turkey