UK house prices down 1.2% in September

According to the Halifax index, UK house prices have been down 1.2% in September, with an annualized decline of 12.4% in the last quarter. It looks a given that house prices in UK have come down at least 10% from the peak, the question is where will they stop?

I think the earnings ratio might give us some idea. At the peak, the ratio between house prices and earnings was 5.8 / 5.9, and it appears to have come down to 5 / 5.1 nowadays. The ratio tells how many years of earnings a house will set you back, so with a ratio of 6 you need 6 years of gross earnings to buy a house. Considering an average tax rate of, say, 35%, it means you’ll need full 9.2 years of your earnings to buy a house -provided you don’t spend a penny-.

The historical average of the ratio is 4, but I think you could expect the market to overshoot a bit during the downward trend. Let’s say 3.5, but the index has been even lower.

Let’s look at the earnings side. I don’t expect earnings to grow massively in the next couple of years. If they grow 2%, I would consider ourselves lucky.

Here the calculation of the potential downtrend according the above assumptions, and assuming a horizon of 2 years:

1- fall from 5.1 to 3.5 -> 32% of prices decrease

2- earnings growth -> 4%

3- expected house prices drop: 32% – 4% = 28% from CURRENT LEVELS

I think this fall is not impossible or unrealistic. Actually, considering the extremely adverse financial and economic conditions, a bigger overshooting might be possible. This might happen in 2 / 3 years.