House Prices remain "overvalued" in the UK

House Prices remain overvalued and current price rises are only due to lack of supply in London and the South East.

That is the view of respected economic commentator Jeremy Warner, assistant editor of the Daily Telegraph.

Writing in the paper today, he said: "Despite a real-terms fall of around 25pc since the start of the crisis, UK house prices continue to look overvalued in terms of their historic relationship with disposable incomes. Remember that incomes have been falling too in real terms, so the ratio of prices to income hasn't changed as much as inflation-adjusted prices.

As everyone knows, the prime reason for sky high house prices is lack of supply, particularly in London and the South East, but a second reason is our old friend QE, which, as in other markets, is creating major distortions. Cheap money allows households to support much higher debt than otherwise, and has therefore put something of a floor under house prices.

By subsidising mortgages, the Funding for Lending and Help to Buy schemes will further support prices while doing little to improve supply. Upward pressure on house prices is therefore likely to continue as buyers return, threatening an eventual rerun of some of the causes of the original credit crisis. The point at which things turn ugly again depends on how quickly the Bank of England removes support. Central banks think they can engineer a soft landing. They hope for a Goldilocks outcome – not too hot and not too cold – where they can slowly wind down the printing press while keeping the recovery alive. Everyone else has got their doubts.

As for second homes in Europe, there is little cause for optimism on that front. The fall in house prices in the major areas of British ownership – Spain, Portugal, Greece, France and Italy – is far from over. British interest in buying overseas has also soured as a result of a relatively weak pound.

I'm sounding a bit like a broken record here, because the outlook for sterling also depends on QE. The policy goal of rebalancing the British economy away from debt-fuelled private and government consumption to exports and investment requires a low pound, and if it is true that the Bank of England's incoming governor, Mark Carney, is of the "print, baby, print" school, we can expect the pound to go lower still. Still, at least that would help prolong the party in UK asset prices a while longer."

Full article http://www.telegraph.co.uk/finance/personalfinance/investing/10119315/Jeremy-Warner-predicts-house-prices-stock-markets-and-the-pound.html