House Price Earning Ratio Examined
There have always been a number of methods to hand from which to form an opinion on UK property prices. It is a crucial and often-neglected point that there is a fundamental distinction between property being labelled unaffordable versus overvalued. Whilst it is clearly arguable that for those on the lower rung of the ladder, notably in the capital, unaffordability from a price/earnings point of view is a genuine issue, whether an asset bubble has formed and prices have become distorted is a different question entirely and requires looking at individual market dynamics and the demographic of market participants. For example the presence of such a large hoard of cash rich investors in London (particularly in prime Central) means we can not simply rely on P/E ratios to understand and predict house price changes.
We believe that the current low inflation and strengthening labour market environment will underpin growth in real earnings, which in turn should keep a lid on the house price/earnings ratio as one measure of affordability.