Heath, a trained economist, said house prices outside London have fallen dramatically in real terms and by his count Nationwide’s figures suggest the average British home has fallen 24.2% from peak to trough if you adjust for inflation.
Halifax’s numbers meanwhile show an inflation-adjusted fall of 33% - far more than the 19% decline in nominal terms.
Heath said: “Average house prices are back in real terms to levels last seen in the first quarter of 2003. In other words, all of the gains incurred over the past nine years have been completely wiped out. For most people in Britain, housing has been a poor investment over the past decade.”
Andrew Lilico of Europe Economics calculates that the real-terms peak-to-trough collapse in the 1990s was 33.9% which Heath said “could easily be surpassed next month”.
Heath added: “The Nationwide figures imply that house prices remain at least 20% too high compared to earnings when using long-run estimates of the price to earnings ratio.
“One reason for this is that real wages have been falling sharply. But only half of the over-valuation in the UK housing market has been eradicated; so unless nominal prices fall significantly it will probably take another five years for consumer price inflation to bring the market back into synch.”
And he warned that those in the London property market were not safe from drastically falling house prices despite the capital suffering a peak to trough fall of just 2% so far.
“The capital’s price to earnings ratio is at a horrendously unaffordable 7.4 times,” said Heath. “Given how over-valued the London market is, and its dependence on a troubled City and declining bonuses, as well as on potentially fickle foreign cash, a severe readjustment at some stage is a strong possibility, despite supply shortages.
“London property owners should resist succumbing to delusion. It is also dangerous for the government to encourage first time buyers to jump into the market when prices are falling in much of the country. And at some point, the Bank of England will hike interest rates – and then all bets will be off.”
