House price falls have pushed the national rental yield up to its long-run average, suggesting housing is now fairly valued by historical standards. However, if the yield were to overshoot the average by the same extent as it undershot during the boom – a not unreasonable assumption – house prices would fall by a further 16% from current levels.

The national rental yield is derived from national accounts data by dividing the sum of actual rents paid by households and imputed rents of owner-occupiers by the value of the housing stock. It averaged 3.59% between 1965 and 2007. The national yield is lower than alternative measures because it includes subsidised social housing, takes account of vacant properties and is calculated using end-period prices.

The most recent official figures are for 2007, when the yield stood at 2.84%. House prices fell by 18% in the year to December 2008, according to the Halifax index. Applying this decline to the value of the housing stock at end-2007, and taking into account rental growth of 5% in 2008, the rental yield is estimated to have risen to 3.63% by the end of last year – see first chart.

The end-2007 yield was 0.75 percentage points below the long-run average. If the yield were to overshoot by the same amount during the current downturn, rising to 4.34%, house prices would fall by a further 16% from their December 2008 level, assuming constant rents. The implied decline would obviously be larger to the extent that rents fall, as suggested by the last Royal Institute of Chartered Surveyors residential lettings survey – second chart.

A further fall of 16% would imply a peak-to-trough decline in inflation-adjusted house prices similar to the early 1990s housing downturn – see here.