Every year in May I like to spend a few hours of my life that I’ll never get back preparing a house Valuation metric that goes beyond that generally presented by the mainstream media by getting more granular and trying to Value housing at County level. This should then for example help us to understand if there really is a north south divide when it comes to housing. Last year’s efforts can be seen here.
My definition of Value is simply how many years of gross earnings (median and average) are required to buy an average house. This is a simple average Price to Earnings Ratio (P/E) and is not unlike how some might value a company share. Importantly I am not interested in Affordability which is one’s ability to service debt at current interest rates and is what I think actually drives the UK housing market. This is because I believe that the average punter doesn’t ask is this house good Value but instead asks how much can I borrow and then spends to that limit.
For House Prices I am using average house prices as published by the Land Registry. This is calculated by using:
The Valuation analysis is arranged according to the Regions and County’s defined by the Land Registry and is shown in the Table below. Unlike the mainstream media I am calling high house prices bad (unsurprisingly the County with the highest house price is London at £462,799 and is shown in dark red) and low house prices good (the County with the lowest house price is Middlesbrough at £62,546 and is dark green) with all other prices shaded between red and green depending on house price.
For Earnings I am using the 2014 Annual Survey of Hours and Earnings (ASHE) which provides information about the levels, distribution and make-up of earnings and hours paid for employees within industries, occupations and regions in the UK. To ensure that our Earners and Homes are located within the same County I’m using the Earnings by Place of Residence by Local Authority. This dataset presents weekly Earnings at both median (the middle point from each distribution) and mean (the average) levels which we have arranged into each Land Registry Region and County in the Table below. I then multiply the data by 52 weeks to convert it to an annual salary. I am calling low earnings bad (the lowest average earnings are £17,638 in Blackpool and are dark red) and high earnings good (the highest average earnings are £36,982 in Windsor and Maidenhead and are dark green) with all other earnings shaded between red and green depending on earnings.
By combining the two datasets we can see the valuation of houses across the County’s of England and Wales. The formula remains Value equals Price divided by Earnings (P/E) with the results shown in the table below. The 2014 to 2015 year on year change in value is also shown.
Click to enlarge, The Earnings, House Prices and House Values of England and Wales at County Level
Depending on your region this data will tell you something different but a couple of observations:
In the interests of full disclosure I remain out of the housing market and continue to refuse to buy what I believe is overpriced property within a search area commutable to my work (London and the South East). Given the stage of my current journey to Financial Independence it is now unlikely that I will ever buy here. There is a chance that I may buy a home for cash elsewhere in the UK, should I take Early Retirement in the next couple of years, however even that is now only a slim chance. The most likely plan is now a home that comes on a much better Valuation somewhere on/in the Mediterranean.
As always DYOR.
My definition of Value is simply how many years of gross earnings (median and average) are required to buy an average house. This is a simple average Price to Earnings Ratio (P/E) and is not unlike how some might value a company share. Importantly I am not interested in Affordability which is one’s ability to service debt at current interest rates and is what I think actually drives the UK housing market. This is because I believe that the average punter doesn’t ask is this house good Value but instead asks how much can I borrow and then spends to that limit.
For House Prices I am using average house prices as published by the Land Registry. This is calculated by using:
- The Land Registry House Price Index (HPI) dataset. This index uses repeat sales regression (RSR) on houses which have been sold more than once to calculate an increase or decrease. As it analyses each house and compares the latest buying price to the previous buying price it is by definition mix adjusting its data also. It uses all residential property transactions made in England and Wales since January 1995 so covers buyers using both cash and mortgages.
- Average prices are then calculated by taking Geometric Mean Prices (as opposed to an arithmetic mean), to reduce the influence of individual values, from April 2000 and adjusting these prices in accordance with the Index changes. They are seasonally adjusted. I am using the latest published data which comes from March 2015.
The Valuation analysis is arranged according to the Regions and County’s defined by the Land Registry and is shown in the Table below. Unlike the mainstream media I am calling high house prices bad (unsurprisingly the County with the highest house price is London at £462,799 and is shown in dark red) and low house prices good (the County with the lowest house price is Middlesbrough at £62,546 and is dark green) with all other prices shaded between red and green depending on house price.
For Earnings I am using the 2014 Annual Survey of Hours and Earnings (ASHE) which provides information about the levels, distribution and make-up of earnings and hours paid for employees within industries, occupations and regions in the UK. To ensure that our Earners and Homes are located within the same County I’m using the Earnings by Place of Residence by Local Authority. This dataset presents weekly Earnings at both median (the middle point from each distribution) and mean (the average) levels which we have arranged into each Land Registry Region and County in the Table below. I then multiply the data by 52 weeks to convert it to an annual salary. I am calling low earnings bad (the lowest average earnings are £17,638 in Blackpool and are dark red) and high earnings good (the highest average earnings are £36,982 in Windsor and Maidenhead and are dark green) with all other earnings shaded between red and green depending on earnings.
By combining the two datasets we can see the valuation of houses across the County’s of England and Wales. The formula remains Value equals Price divided by Earnings (P/E) with the results shown in the table below. The 2014 to 2015 year on year change in value is also shown.
Depending on your region this data will tell you something different but a couple of observations:
- Across England and Wales Value has degraded by 6.4% over the past year which is bad news if you’re trying to get on the ‘property ladder’. Regionally though it’s a different story. Average the Counties in the North and Value has improved by 4.6%. Similarly the North West has seen an improvement of 3%. Head to the Counties of the South East and Value has fallen by 10.6%. London has seen value fall by 12.7%.
- There is a factor of five between the best value house County, Hartlepool, at a P/E of 2.9 and the most over valued County, London, now on an incredible P/E of 14.1. Yes you read that right, London house prices are now 14.1 times average London earnings. What hope does the average punter have here...
In the interests of full disclosure I remain out of the housing market and continue to refuse to buy what I believe is overpriced property within a search area commutable to my work (London and the South East). Given the stage of my current journey to Financial Independence it is now unlikely that I will ever buy here. There is a chance that I may buy a home for cash elsewhere in the UK, should I take Early Retirement in the next couple of years, however even that is now only a slim chance. The most likely plan is now a home that comes on a much better Valuation somewhere on/in the Mediterranean.
As always DYOR.
Very interesting. Housing in Southern England is the most expensive and worst value in Europe and I can see the justification for your decision RIT. What I find extraordinary though has been the population's ability over the past decade to absorb these eye-watering prices without moving elsewhere.
ReplyDeleteVarious reasons have been given, including the presence of ultra-low interest rates, the fact that most (>80%) private sector job creation is in the South East, the pressure of inward migration keeping demand high, and lack of new builds keeping supply limited.
Yet as the current situation worsens it leaves the housing market increasingly vulnerable to external shocks. If Cameron gets his way and the UK faces a messy divorce from the EU (and perhaps internal disintegration), it is possible we will see a run on sterling (forcing up interest rates), a sharp fall in inward migration, and rising unemployment as businesses delay investment and recruitment or move elsewhere to access the single market. All of which could cause a very nasty shock to the housing market sooner than many realise.
I am always surprised when people repeat that mainstream media points targeting to shape public opinion into what some shadow groups behind it need from public. Unless you can back up your statement about EU being so good to UK, keep it for yourself.
DeleteLoss of sovereignty, loss of independent foreign policy to Washington and Brussels, etc. there are many things why the public wants to move away from EU.
And what you find valuable from EU membership, it can stay without UK being in EU. Look at Switzerland, the country with the highest income in the world.
K.
Calm down - this is a discussion about the housing market and its likely future trajectory in the context of the UK economy. Rather than chest-thumping or parroting UKIP and Daily Mail myths about what the 'public' want, first take the time to get properly informed before arrogantly telling others to withhold their reasoned arguments.
DeleteSince you asked, let me explain in more detail. What is relevant here is the likely impact of EU 'exit' and the uncertainty caused by such a referendum on the UK economy, and by extension the housing market, not our foreign policy (which, if you understood anything about the balance of competences, the EU has little control over). There are hundreds of studies which have shown that there have been significant foreign investment inflows as a direct result of our EU membership. Many of the largest economies such as the US, China, India and Japan view the UK as their gateway into the EU - indeed the US government and many foreign firms operating here have warned that leaving the EU would cause them to reduce that investment. In the short term, most economists and business leaders (eg the CBI) have also said that the uncertainty caused in the run-up to a referendum would also lead to companies diverting or postponing investment into the UK (this also happened during the uncertainty caused by the Scottish referendum). Lower investment reduces demand and thereby growth, leading to lower levels of recruitment. Growth would also be weakened by net outflows of migration.
There is ample evidence also that uncertainty and the prospect of lower growth would lead to markets viewing sterling unfavourably, causing it to weaken (as we saw during the Scottish referendum when the outcome was in doubt). An EU exit would almost certainly be opposed by Scotland and the SNP, leading to the break up of the UK, with all the damaging economic consequences that would cause, further weakening support for sterling. There is nothing that markets like less than uncertainty, and a dramatically weakened pound would force up interest rates in an effort to combat this decline and the consequent inflation.
You might not like it, or have a fantasy of returning to some kind of splendid isolation, but these economic factors are driven by markets and forces over which neither you nor any of the rest of us have control. I can't believe such basic economic realities are unknown, but if so, you could begin by looking at the most recent FT economists' survey on this issue. It is perfectly sensible to analyse the effects these outcomes would have on the UK housing market.
And BTW the Swiss (whose wealth has largely been generated from being a tax haven) do not have the highest income in the world, not even in Europe (that accolade falls to Luxembourg, an EU member). It also, as you are perhaps unaware, has to sign up to a the greater bulk of EU regulations and law (including most of those which UKIP members bellyache about), over which it has no say or control, in order to gain access the single market.
Do not underestimate the fact that most people do not like to move unless they really must. The factors are too numerous to list, and many are subtle, but I can very well see why most people do not want to move.
DeleteAnd my tuppence worth re EU membership. We should not have gone in but now, particularly while we are weak, it would be very dangerous and messy to get out. What we need to do is more practical bending of the EU rules as individuals; we need to be more French. The English are not very good at bending rules so we need to have a new mindset. EU north are sticklers for the rules while the EU south are corrupt; both cultures need to meet in the middle.
DeleteJim F - this is a good point. For a long time the UK Government has had a reputation for 'gold-plating' EU directives by adding many more regulations than necessary when transposing these into our law. As a result much of the 'red tape' that people complain about has been the fault of our own Government. If our leaders had more intelligence they would adopt the approach you indicate.
Delete"There are hundreds of studies which have shown..."
Delete"There is ample evidence also..."
Those are typical phrases used when one tries to defend his point of view but has nothing like facts and actual references to original sources.
EU has little control over foreign policy? Really? You mean that EU nations always join EU policies because they all find that they will benefit from them? The recent EU sanctions against Russia actions in Ukraine when some countries lost huge share of market (1 billion EUR across EU) is indeed the proof.
Follow your statement about Swiss, UK can do the same without being a member of EU by choosing which policy to adopt and which not.
The main benefactor of UK staying in EU not UK public but Washington as it can influence Brussels using UK as a proxy.
I expect that since Conservatives won the election, and before the referendum, we suddenly see a lot of previously unknown versatile commentators in popular blogs who will be trying to convince how valuable EU is for UK...;) Good luck with it.
K.
"Click to enlarge" ? When I click, the window that opens has an even smaller version of the image. Is it just my browser?
ReplyDeleteTry right clicking on the image and opening in a new window.
DeleteMuch of Spain is looking interesting for property. Forget the holiday home stuff, Madrid, Barcelona, Valencia, Sevilla, Malaga - all interesting cities with real value
ReplyDeleteMy better half has developed a bit of a soft spot for the region between Malaga and Marbella. Intend to try and spend a bit of time there over the coming 12 months or so.
DeleteBTW how did you get on with the Tim Hale books?
I can't afford to get about by helicopter, so London's not for me. Also it's got a nasty, sticky microclimate that I dislike intensely.
ReplyDeleteAnd also has a lot of bad elements mostly in the council houses and they are all spread around!
DeleteWhat a fascinating table! Thanks a lot for putting that together and putting it into language/terms that are easy to fathom for the average investor.
ReplyDeleteIt is a rather striking set of data. Like you, I'm not on the property ladder and have little intention to do so. This sort of table really shows just how contrasting people's experiences are around the UK.
Value is what one gets, price is what one pays. Has any other reader ever lived/worked in Hartlepool? Believe me, no PE is low enough! That said, I have had the misery of working and living in London too. A brilliant piece of work RIT - it would be fascinating if some kind of 'quality' multiplier (subjective I know) could be introduced.
ReplyDeleteI've lived and worked in Hartlepool before. Sure, it's not a beautiful place, but it's within 45 minutes drive of Newcastle, Durham or the heart of the North York moors, and the town is really not that terrible. Better than paying 50% of my income to live in a box in London an hour's traffic jam away from the countryside (in my opinion). I worked at the nuclear power station, and was paid exactly the same for doing the same job as someone at a nuclear power station in Kent or Suffolk, but with housing a third of the price. If you've got a job, it's really not that bad. Sucks if you're born into poverty and chronic unemployment, but if you've got an income it's OK.
Delete14 times average earnings is eye watering. Yet, still, houses sell within a matter of weeks.
ReplyDeleteI do think a lot of people purchase a house as it is seen as the 'mature' thing to do., but with little thought for valuation. I suppose rent and house values, so mortgage payments, will have a direct correlation, but with interest rates low a direct comparison between the two will only inflate house prices. Who knows what will happen when rates eventually rise.
RIT any idea where in the UK you would potentially look? I can't see Blackpool being as appealing as Italy some how...
The negative is having spent as long as we have in London if we stay in the UK we are going to want a little space around us. That is pretty limiting given current valuations. The advantage we'll have is that we won't be making a decision based on job availability. County wise we have a bit of a soft spot for Suffolk and Herefordshire but we're pretty much priced out now. One option would be to go further west into Powys - some beautiful spots within that County.
DeleteOutside the scope of this post but another thought is to head very north to the Scottish Highlands. Having spent time there in both winter and summer the seasonal differences are fabulous. You really do appreciate summer! I was in the region again fairly recently for work and it is a beautiful part of the world.
If we were to stay in the UK I think the plan would be to travel extensively first before making the leap anywhere. I've learnt that there's gold in amongst many of what seems very average locations. If we were FIRE'd we'd have plenty of time for research :-)
Agree with you on Blackpool not being as appealing as Southern Italy. I do think we'll end up somewhere in the Med but that said I still do love this great country...
Suffolk and Herefordshire would be nice. Devon and Cornwall have always appealed to be, but the property there has always felt too expensive.
DeleteI have only been through the Highlands once, while cycling to John O'Groats and it was stunning. Like you say, research would be needed as I imagine the reality of living somewhere would be completely different to what we imagine.
Watching the Giro d'italia at the moment (the cycling race) and Italy, as ever, looks amazing.
This is really fantastic and useful resource, it's well worth your time to develop I think! Thanks so much
ReplyDeleteCheers
Thanks for your work on this RIT, it's a fascinating table, unsurprising that London is expensive but the numbers are shocking still.
ReplyDeleteWhen I read news about London house prices, it's like I'm reading news about a different country as it's so far removed from what we have up here (North West).
Recently, it was reported that first time buyers needed an average salary of £41k to get on the housing ladder - obviously included London prices for it to be so ridiculously high!
Thanks for this RIT. I love to see a good data graphic :)
ReplyDeleteAs to all the commentators talking about "the ladder". There is no ladder, just steps on a pyramid ;p
Great bit of research, thanks for sharing. As someone from Hartlepool who has been living in London for the past 10 years I've been an active investor in Hartlepool property over the past couple of years. London is ridiculous, I earn over 100k yet am priced out, hence buying in Hartlepool instead. For anyone thinking of buying there because it's cheap, don't bother. If you buy in the wrong area, which is the majority of the town, you may struggle to find a tenant who cares about paying the rent. In other words you really need to know where to buy. This is limited to a few streets where a realistic 8-9% yield is standard, where the tenant is likely to pay the rent.
ReplyDeleteA three or four bed house with a good sized garden can be bought in many Middle and Northern parts of the UK for around £150K. Within an easy one hour commute of airports and employment hubs. And with the security of knowing a financial system 'bail in' is incredibly unlikely.
ReplyDeleteIf I were financially independent then chances are I'd keep my money and primary residence in the safety and security of one of the many affordable parts of the UK and indulge my European travel longings via rental or a very cheap owned central Europe property of less than £50K.
Cheers,
A1
Interesting information. Have you accounted for the the 'two salary' effect on valuations/affordability? People who are married/in partnerships would seem to have an advantage over the single - and this might explain why very expensive housing remains 'affordable' to some. I would be interested to hear what you think about this and if you have included it in your 'affordability' calculations.
ReplyDelete