SO IS THERE A NEW PARADIGM IN UK HOUSE PRICES?

Originally Published July 19th, 2010.

According to the Nationwide Building Society, UK new home prices have risen 3% in the first half of 2010, following a previous flat year. This amounts to an astonishing recovery from the global pessimism that remains in most developed economies. So is it sustainable, and why? Like gold bullion, London realty appears to be a safe haven play in troubled political and economic times. Britain possesses one of the oldest democracies, a tolerance of extremists and, a language that is used globally in business, medicine, computing, movies and music. London specifically, has extensive cultural and leisure facilities and, the world’s busiest international airport. Wealthy Russians and Arabs, concerned Greeks, and many other nationalities, purchase holiday or rental properties in the Capital without due regard to the economic situation in the UK.

Whilst after the 1989 housing bubble burst it took four years, for new home prices in the UK to start showing positive gains; recent gains are in line with long term historical performance. Since 1964 UK new home price increases have outperformed US by an average 3.25% annually (in national currencies), however during the same period the pound has fallen an annual average of 1.62% against the dollar. This outperformance may have something to do with relative population density. So there may be some justification to believe that UK home prices can continue to outperform US.

Sources: US Census Bureau: Average Sales Prices of New Homes Sold in United
States, Nationwide Building Soc. Price New Houses (UK)

However, when we look at the affordability to nationals of their new homes (measured by the annual differential from the average new home price / GDP / population) justification for continued home price growth in the UK seems less justifiable. As at the end of 2009 UK new home prices were seven times the average gross domestic product per person.

Further source IMF: GDP/capita, current prices.

The battle lines between local and foreign residential house traders in the UK are drawn. Higher taxes, high unemployment, government austerity measures and, lack of credit, are holding back the British, while cash rich foreign buyers continue to invest. The question is, what do these foreign buyers know that the British don’t?

Published July 19th, 2010.

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