Last week we started going through our list of important
indicators that hopefully will help us understand the housing
market. We have already mentioned the Affordability Index, and
the Rent to Mortgage Costs Ratio. Both of these are really
important indicators, but we have a few more to look at.
The next on the list is the House Price Index. You can keep
abreast of this by checking the Nationwide index. From this it
appears that house prices have risen over the past year by
My own view is that, on its own, the index tells us very
little. After all, it is a lagging indicator. That's not much
good if you want to look into the future. House prices may
rise, or they may fall, but the important issue is to track
this indicator against other indicators. If house prices rise
when wages don't, or when wages fall, then you can expect
prices to stall or fall in the future. If prices rise roughly
in tandem then the market is stable. If wages take off, then
house prices may well follow.
At the time of writing (December 2020) UK wages are rising at
approximately 2.7% p.a. This figure needs to be adjusted for
inflation, and since inflation for the same period comes in at
1.8%, average earnings will have effectively increased by only
Now we have to do another calculation. House prices have risen
by approximately 5%, while wages have risen by almost 1%. It
doesn't take a mathematical genius to work out that house
prices are rising faster than wages. It also doesn't take a
genius to work out that means house prices are heading towards
unsustainable levels. The affordability of the average house
for the average person has risen and is still rising.
Under normal circumstances we would set that against the
economic carnage that politicians are inflicting on economies
around the world on the excuse of covid-19 measures. In other
words the outlook for house prices in the medium term is for
any rises to be temporary. That means that buying a house
right now could be a mistake.
In the previous video we spent some time discussing the Rent
to Mortgage Costs Ratio. I gave a brief explanation of how to
calculate that ratio, but also pointed out that the figures
must of necessity be very local so that is not something I can
put figures on at the moment.
Our next index is another that I invented myself, the Auction
I find it works very well in a rising market but is not so
useful in a falling market. The reason for this is simple. It
will clearly tell you when prices are too high (although it
does not predict a top). That is a useful warning to people to
ease off on the buying activity. In a falling market one
shouldn't be buying anyway, so the warning is not really
necessary. However I do like to do a calculation maybe once or
twice a year in a falling market just to see if any changes
are taking place that I wouldn't otherwise notice.
For the record, you have to know that on the index a figure
between one and ten means that prices are low and therefore
sales are high, and are probably poised to rise. In other
words this would normally be a buy signal. A figure between
eleven and twenty means the market is roughly in equilibrium.
Figures over twenty show that prices are too high which is why
many properties are failing to sell. A figure above thirty
would indicate absurd price levels, and would indicate that
anyone buying is paying way over the odds.
What these figures indicate is that when people are buying and
the index is low, buyers are having no difficulty in raising
the necessary funds, whereas when the index is high, rather a
lot of properties are left on the books, presumably because
potential buyers are in short supply, and that indicates that
prospective purchasers are baulking at the prices which simply
means they are too high.
Another reason to follow auction prices is that they are a
forward indicator. Typically completion takes place within
four weeks of the auction date. Normally, house completions
can take anything from 3/4 months, which means auction prices
are a little ahead of the game.
The index is worked out very easily. You take an auction and
discover what percentage of properties fail to sell. If they
sell before the auction date, or closely afterwards then those
sales would be classed as being part of the auction. Any sale
taking place a week or more after the close of the auction
would be disqualified.
If there are 200 lots in the auction and 178 of them sell on
the day, then 22 have failed to sell. In short 11% of the lots
did not sell. The index is therefore 11. If there were 150
lots and 30 failed to sell, then the index would be 20. It's
as easy as that.
The theory behind the scale is simply that the more lots that
fail to sell the more prices are deemed to be unacceptable. If
all lots sell then prices obviously have room to move up. Once
the ratio of unsold lots goes above 20 it means that an
increasingly significant number of lots are seen to be
over-priced. It doesn't indicate that prices will fall, but it
does indicate there is price resistance, and that in itself
shows that some people are paying more than they should for
properties. Putting it another way, the higher the index, the
less good deals there are. No professional buyer should be
buying with the index over 20 unless there is an anomaly in
the list of lots.
Let's have a look at some recent auctions and see where the
The figures are all over the place. Did anyone expect anything
else in the messy environment in which we live? The lowest
figure I have is 1. That is in the South. The highest is 56,
which is a figure for an auction covering the whole country.
Why so high? Several auction houses are having properties
pulled from the list. The obvious conclusion is that some
folks are nervous, and I dont blame them.
If I pull out the properties that have been withdrawn from
sale I get a different picture. There are several regions
where the figure is zero, which means there is no evidence at
all of over-pricing. There are several markets in the teens,
which is healthy. In fact there is only one area where prices
are way too high, and that is in Sussex. (Hmmm, what on earth
possessed me to sell all my South Coast properties?) These
figures are for December only.
Finally we need to look at the state of the mortgage market.
At the moment with lockdowns in place, businesses forcibly
closed, a sudden increase in the unemployment figures, rent
and mortgage holidays, and so on, you can take it that anyone
lending money on house purchases has to be a foolish optimist.
First, why lend to someone who might be added to the
unemployment figures in a month or so's time? Why lend to
someone who may need a payments holiday? Why take a risk on
house prices holding up in the face of the economic woes?
The longer this pandemic continues, the more likely mortgage
companies will look to retrench. The lending environment has
to be close to panic stations.
So where does this leave us with regard to the state of the
housing market? Next week we'll tot up the damage and come up
with some conclusions. Until then, stay safe and keep the home