Valuing the Property of England and Wales at County Level – Year 2

This time last year I introduced a house valuation metric that went beyond the usual whole of United Kingdom or England and Wales discussion carried by the mainstream media.  Instead I dissected both the salaries and house prices of England and Wales to prepare a valuation covering each County.  It showed some interesting results including nearly a factor of four between the best valued and the most over valued County.  Additionally, there was an obvious North and Wales to South divide when it came to house values.  We are now 1 year on so today let’s look at what’s changed.

To Value the market we will stay with our previous definition which is a simple Price to Earnings Ratio (P/E).  For House Prices we will stay with the Land Registry House Price Index.  As a reminder this index uses repeat sales regression 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.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  We are using the latest published data which comes from March 2014.  The 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 we are going to call high house prices bad (the County with the highest house price is London at £414,490 and is shown in dark red) and low house prices good (the County with the lowest house price is Merthyr Tydfil at £59,041 and is dark green) with all other prices shaded between red and green depending on house price.

For Earnings we just move the dataset on one year and today are using the 2013 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 Houses are located within the same County we’ll stay 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.  We then multiply the data by 52 weeks to convert it to an annual salary.  We are calling low earnings bad (the lowest average earnings are £16,999 in Blackpool and are dark red) and high earnings good (the highest average earnings are £36,956 in Windsor and Maidenhead and are dark green) with all other earnings shaded between red and green depending on earnings.

There is No Longer a UK Housing Market for the Average Joe

The latest Land Registry monthly release tells us that in March 2013 there were 52,090 house sales in England and Wales.  In March 2012 the volume was 61,334 a difference of -15% in 12 months.  Volumes are also only 38% of the peak volume seen in May 2002 and 64% of the long run average of this dataset.  Meanwhile house prices seem to be doing not much more than the dance of a damped sine wave since 2007.  So even with plenty of market manipulation including the Funding for Lending Scheme (FLS) and Quantitative Easing (QE), which have driven mortgage rates to record lows, this is the best that the Bank of England and UK Government can muster in terms of a market.  This is all shown in my first chart today.

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This all looks pretty bad but it wasn’t until I read the Land Registry May 2013 HPI Statistical Report that I realised for normal people there no longer really even seems to be a market.  The table below shows the sales volumes by price range.  Look at the volumes for houses priced between £100,001 and £250,000.  They’re down between 17% and 27%.  In stark contrast volumes for properties greater than £1,000,000 are up between 15% and 24%.

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Jump to London and its insane house prices and the market is even more finished for all the Average Joe’s out there.  Between £100,001 and £250,000 volumes are down between 38% and 46%.  In comparison if you’re looking to spend over £1,000,000 then you have some competition with other would be “wealthy” future house owners with volumes up between 20% and 29%.

The Regional House Prices of England & Wales

The Land Registry House Price dataset uses repeat sales regression on houses which have been sold more than once to calculate an increase or decrease in price.  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.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.

If we look at April 2013 for all of England & Wales it tells us that house prices were £161,458 which month on month is an increase of 0.4% and year on year is an increase of 0.7%.  If this was published in the mainstream media readers would think house prices are still rising.

The chart below then plots the complete Land Registry dataset for England & Wales since January 1995.  Analysis of this chart would make readers think that prices weren't in fact rising but had actually been stagnant for a number of years now.

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This however really doesn't tell the full story.  Cutting the data by Regional House Prices reveals the chart below.

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To enable some analyse of this regional dataset let’s convert each region into an Index that starts at 100 on January 1995. Now we’re getting somewhere.  England & Wales House Prices can now be characterised by 3 distinct regional variations.  London is a law unto itself with prices up 400% since January 1995.  They also look to be continuing to head northward.  The House Prices of the South East, South West and East Anglia have stagnated with prices up 280-290% since January 1995.  House Prices are then falling, and have been for some time, if you’re in the North, North West, Yorks & Humber, East Midlands, Wales or the West Midlands.

Valuing London Property at Borough Level

The mainstream media usually report UK House Prices at a national level.  Recently we went one level deeper by examining English and Welsh property at County Level however this data left an elephant in the room.  That elephant was London, a small village located in the South East of England with a population of 8.2 million, and one which was included as a single data point.  Today let’s go deeper into London and look at the Salaries, House Prices and Value of each London Borough.

To Value the London market by borough we will maintain consistency with our previous definition which is a simple Price to Earnings Ratio (P/E).  As with the County level analysis we will use the Land Registry House Price Index for prices.  We’ll stay with calling high house prices bad (the Borough with the highest average house price, unsurprisingly, is Kensington & Chelsea at £1,104,770 and is shown in dark red) and low house prices good (the Borough with the lowest house price is Barking & Dagenham at £213,581 and is dark green) with all other prices shaded between red and green depending on house price.  What I find amazing is that Barking & Dagenham, the cheapest Borough, is still 32% more expensive than the England and Wales average.

For Earnings we’ll also stay with the 2012 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 Houses are located within the same Borough we’ll use the Earnings by Place of Residence by Local Authority.  We again multiply the data by 52 weeks to convert it to an annual salary.  We stay with calling low earnings bad (the lowest average earnings are £19,183 in Newham which surprisingly is only 8% higher than the lowest County which was Blackpool and is shown in dark red) and high earnings good (the highest average earnings are £59,441 in Kensington and Chelsea and is dark green) with all other earnings shaded between red and green depending on earnings.

Is it Time to Buy a Home

On the 24th of April 2013 the Bank of England and HM Treasury announced that the Funding for Lending Scheme (FLS) would be extended until January 2015.  It was also modified to include selected non-bank providers of credit to the UK economy.  Between the FLS Scheme, a Bank of England Bank Rate of 0.5% and £375 billion of Quantitative Easing mortgage rates have fallen a long way.  Let’s look at the data.

The Bank of England publishes a number of datasets on this topic and I have picked 5 which cover the more common mortgage types available today.  They are the sterling monthly mortgage interest rate of UK monetary financial institutions (excluding Central Bank) covering:

• Standard Variable Rate (SVR) mortgages.  These were starting to rise at glacial speeds but have now pulled back a little.  Today they sit at 4.34%, flat month on month and up 0.24% year on year. 
• Lifetime Tracker mortgages.  These have been flat for some time now.  Currently they are 3.56% which is flat on the month and sees a decrease of 0.04% on the year.
• 2, 3 and 5 Year Fixed Rate Mortgages with a 75% loan to value ratio (LTV) continue the falls that appear to have accelerated in a downwards direction at the same time the original FLS was announced.  Today we see these mortgages at 2.87% (down 0.04% on the month, 0.79% on the year), 2.98% (down 0.32% on the month, 1.05% on the year) and 3.61% (down 0.02% on the month, 0.68% on the year) respectively.  Since the FLS scheme started the falls are 0.82%, 1.03% and 0.50% respectively.

A history of these mortgage rates can be seen in the chart below which also shows the announcement dates of the Bank of England Bank Rate of 0.5%, 4 tranches of Quantitative Easing and Funding for Lending.

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With inflation currently running at 2.9% you can now get an average real inflation adjusted 2 year fixed mortgage for -0.02%, a 3 year for 0.09% and a 5 year for 0.72%.

I’m currently out of the UK property market in rental accommodation but with my Assured Shorthold Tenancy coming up for renewal in the near future plus a Letting Agent that treats me slightly worse than belly button lint every time the annual negotiation begins, it’s time to reassess whether it’s time to buy.  Today is not meant to be a comprehensive piece of data analysis in typical Retirement Investing Today style, that will probably come later as I formulate my thoughts, but more some musings of what is currently running through my mind in the hope of generating some comment from you the valued reader.

Valuing the Property of England and Wales at County Level

When we, or indeed many websites, look at what is generally called UK House Prices, House Value or House Affordability it tends to be at a high level covering either the whole United Kingdom or England and Wales.  This is fine if you are looking for macro trends but doesn't give us much of a view at what is happening locally.

Given that we are hearing a lot about the North to South divide or even the London to rest of the UK divide let’s therefore deviate from that traditional macro view and get a bit more local by calculating House Value down to a County level.

To Value the market we are going to stick with our previous definition which is a simple Price to Earnings Ratio (P/E).  Regular readers will know that for Price we normally use Nominal House Prices as published by the Nationwide and for Earnings the Office for National Statistics KAB9 Nominal Earnings which are both published monthly.  Unfortunately these aren't available down to County level and so we need to introduce two new datasets.

For House Prices we will use the Land Registry House Price Index.  As a reminder this index uses repeat sales regression 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.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  We are using the latest published data which comes from March 2013.  The 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 we are going to call high house prices bad (the County with the highest house price is London at £374,568 and is shown in dark red) and low house prices good (the County with the lowest house price is Merthyr Tydfil at £66,511 and is dark green) with all other prices shaded between red and green depending on house price.

For Earnings we are using the 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.  Unfortunately, as the name implies, it is only published annually and so we will use the 2012 dataset.  To ensure that our Earners and Houses are located within the same County we’ll use 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.  We then multiply the data by 52 weeks to convert it to an annual salary.  We are calling low earnings bad (the lowest average earnings are £17,794 in Blackpool and are dark red) and high earnings good (the highest average earnings are £40,466 in Windsor and Maidenhead and are dark green) with all other earnings shaded between red and green depending on earnings.

Australian Property Price to Income Ratios*

Looking at real estate price to income ratios can give a good indicator about whether or not now is a good time to buy property in Australia. Although housing prices have remained high throughout the past decade despite a global economic downturn, have incomes followed suit? In looking at prices from 2010-2011, home prices fell slightly while incomes have risen. According to a 2011 press release from realestate.com.au, mortgage payments comprised 34% of average household income in 2010, but this number declined to 32% in 2011. This has made housing slightly more affordable across the nation.

Fluctuations in Price to Earnings Ratios

Interest rates play a role in the affordability of Australian housing, and can experience a variety of ups and downs over the span of a 30-year loan. This is important to remember when you're deciding whether or not to invest. The ratio of house prices to household earnings has increased 2.5 times since 1970, with the biggest increase seen in the early 2000s. The ratio doubled during that period, even with more houses having two income earners. According to figures published by The Motley Fool, the average first home loan has gone up from $75,000 20 years ago to nearly $300,000 today. This doesn't match the corresponding rise in income. The average first home loan was 3.1 times the average income in 1994, but it is now 5.6 times the average household earnings, putting first-time homebuyers further into debt.

Average house prices in many Australian cities have continued to increase over the past several years. According to a survey conducted by Demographia, Sydney is the third-least affordable city in the world when price to earnings ratios are taken into account. Figures from the Australian Bureau of Statistics show that house prices rose in 5 out of 8 of Australia's major cities between September 2011 and September 2012. Prices climbed by 8.2% in Darwin and 4.4% in Perth, while they fell 1.1% in Adelaide. This indicates that now may be a good time to find property in Adelaide with Homesales or other listings services, while it may be better to hold off in Perth.

UK House Affordability

For a long time I’ve been saying that houses are overpriced.  This statement keeps my family in rented accommodation as I refuse to buy at these prices.  So while in recent years there has been some nominal reduction in prices, reversion to a sensible mean value stalled in 2009.  This was further reinforced last week when the Nationwide informed us that month on month house prices had increased by 1.1% and year on year had fallen by a negligible 0.7%.

So about now I would normally start to correct the Nationwide House Price Index to account for the devaluation of money through inflation and ratio this with average persons earnings.  I would then come to the same conclusion that I always do.  House prices are overvalued when compared to the long run average.  I’m now starting to think that I am going about this the wrong way.  The average person on the street does not analyse data and look at what house prices should be.  The average person on the street instead knows the price of everything and the value of nothing.  Instead, I’m starting to come to the realisation that what is driving this market is not house prices but simply house affordability.  Not how much is this house worth, but instead can I today (no thinking of future interest rates) borrow enough money to buy this over priced piece of bricks and mortar.

So what drives affordability?  I believe the major drivers are two things:

• How much a person earns, and
• How much of these earnings have to go to make interest payments today

Is Brisbane Cooling – Australian Property Market – November 2010 Update

The Australian Bureau of Statistics (ABS) in November published both its House Price Index and its Average Weekly Earnings Index. Let’s therefore have a look if the country which both avoided recession and seems to have a Central Bank that is interested in controlling inflation but which to me looks like it has a bubble of a property market is still as bullish. I say has an interest in controlling inflation. The RBA has been steadily raising its cash target rate over the last year and a half to 4.75%. This is in stark contrast to the Bank of England’s 0.5% who as I’ve described before has no interest in sticking to their inflation remit with inflation now above target for about 40 of the last 50 months. Regular readers of course know that I keep a close eye on Australia as it is still a potential “retirement” location for me even if £1 today only buys a poorly $1.6199.

How long until a house can be bought for 100 ounces of gold?

For a long time I’ve been saying that houses are overpriced. This keeps my family in rented accommodation as I refuse to buy at these prices. Instead I now watch what looks to be the early beginnings of an unravelling housing market from the sidelines. My last UK house price update was here.  Additionally, as I mentioned yesterday while gold is reaching new highs in nominal terms when prices in US Dollars it is not at new highs when priced in British Pounds although admittedly it is close. However, it is nowhere near new highs when priced in real (inflation adjusted) terms and so in my humble opinion still has plenty of upside potential if history is anything to go by.

Look further than the press releases – UK Property Market – August 2010 Update

If you were reading the papers over the last few days you will have probably seen the house price data from the Nationwide reported on. This will have been taken straight from their press release and I’m sure monthly changes of -0.9% will have been mentioned. I however prefer to analyse the raw data as the figures presented to the press are seasonally adjusted. The actual figures are worse than that reported. In July 2010 prices were £169,347 and in August they are now £166,507. That is a fall of 1.7% in a single month with the annual change now at +3.9%. This is now 2 months in a row that we have seen price falls. This is all shown in my 1st chart today.

The Boom Continues – Australian Property Market – August 2010 Update

With the Australian Bureau of Statistics (ABS) publishing its House Price Index on the 04 August and its Average Weekly Earnings Index yesterday I can again look at affordability of Australian Property. Of course regular readers will now that I have an interest in Australia as with a fair wind 6 years from now it could be a “retirement” location for me.

Where is the summer rush – UK property market – July 2010 Update

It’s at this time of year that I thought it was a tradition for the British people to head out to the Real Estate Agents and start bidding up the prices of already over priced housing. This summer though it’s starting to look like that might not happen. Even the new coalition government don’t seem keen to ramp up property and property prices. Of course they are acknowledging that the country no longer has any money however the previous government seemed to always find some way to ramp prices and keep the plates balanced and spinning. This month has seen both prices and mortgage approvals turn down. Who knows if this continues for a couple of years maybe we might even get to the point where instead of the government forcing builders to build “affordable housing” (or as I have eloquently seen these properties referred to elsewhere, slave boxes) instead maybe we might just get housing that is affordable. What a novel idea.

Houses are still overvalued - UK property market – July 2010 Update

The Economist dated July 10th to 16th 2010 has run a very interesting article entitled “Froth and stagnation – House prices in parts of Asia continue to soar, despite efforts to slow them”. As part of this article they present a table showing a list of countries and detail whether according to “The economist house price indicators” houses are under or overvalued. As regular readers will know I am very interested in UK and Australian house prices however let’s have a look at the list from most over valued to most undervalued first:

UK Property Market – May 2010 Update

David Cameron, George Osborne and others are I guess as I write this post working hard trying to pull together the emergency budget that will take place on the 22 June 2010. We have already seen in the press plenty of commentary about the possible increases to Capital Gains Tax (CGT) and the effect it may have on property prices, particularly the Buy to Let (BTL) brigade out there. Personally I’m not seeing them doing anything to engineer a crash (or even significant reductions in values). This is for a couple of reasons:

Australian Property Market (Alternate Data) – May 2010 House Price Update

The Brisbane and Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index published by the Australian Bureau of Statistics (ABS) catalogue 6416.0 suits my requirement to track Australian house prices as part of my retirement investing strategy.  It however has a big flaw for me by only publishing the housing data quarterly.

UK Mortgage Rates and Mortgage Approvals – May 2010 Update

Today I present two regular charts that as with last month continue to give me little information on what could be occurring in the housing market. The first shows the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households (not seasonally adjusted) and highlights that for this data set rates remain at near record lows at 4.04% for April 2010 (actual low was 3.82% in April 2009). Compare this with the retail price index (RPI) of 4.4% and the average mortgage is better than free money with a negative real interest rate.

Australian Property Market – May 2010 Update

I intend to keep a close eye on Australian house prices as I build my retirement investing today portfolio. This is because Australia is a very likely retirement possibility (if not sooner) for me. I do this by watching the quarterly releases from the Australian Bureau of Statistics (ABS) which is what the content of today’s post is however on a more regular basis I watch the data coming from RPData with my latest post here.

UK Property Market – April 2010 Update

I am still out of the UK residential property market although today I really am beginning to wonder why. It really is amazing what a government can achieve if they are prepared to sacrifice the country long term to keep a bubble afloat. Today the Nationwide reported that average house prices had risen from £164,519 to £167,802, a monthly rise of £3,283 or 2.0%. On an annualised basis house prices in absolute terms are up by 10.5% and if I look at real (after inflation) returns they are still up by 5.2%.

British Bankers Association reports on mortgage lending levels

The British Bankers Association (BBA) reported on mortgage lending levels for March yesterday. As regular readers will know I blog on mortgage lending levels monthly (last month here) however I use the Bank of England data which is currently only published up until February 2010.