Housing market bears are out in force again, claiming that prices will fall by up to 10% this year. The bears have been cheered by a decline during 2010 (by 4% between January and December on the Halifax measure), although they failed to predict the prior stronger rally (10% from a low in April 2009).
The view here remains that there is no big overvaluation to correct, with the national rental yield now close to its long-run average, partly reflecting recent strong growth in rents – see first chart. This is a superior valuation metric to the house price to earnings ratio, the "equilibrium" value of which has risen over time, reflecting factors such as improving quality, the pressure of an expanding population on constrained supply and a high income elasticity of demand for housing.
The December RICS survey showed a net 39% of estate agents reporting lower prices, seemingly supporting the bears. Both the reported and expected balances, however, recovered while the new buyers minus sellers indicator (i.e. the difference between the new buyer enquiries and selling instructions balances), which leads prices, turned positive for the first time since December 2009 – second chart.
