UK housing prices just dropped by 3.6% in a single month… what’s up?
Well interestingly, despite the crash of housing prices which has already happened, the UK’s price-to-earnings ratio for first time buyers remains very high by historical standards as shown below in a graphic from The Economist.
You can see how UK housing prices could collapse further, perhaps even by a third, if the ratio below mean-reverts:
So why did British prices stabilise at a higher level than those in the US, even though the UK bubble was bigger? This was down to two peculiarities of the British market. First, more homeowners had variable rate mortgages and thus they received the full benefit from lower rates. Nor did Britons have the teaser mortgages that marked the subprime boom, in which rates started low and headed higher. As a result, there have been very few foreclosures. The second factor is that British planning laws means there was not the building boom seen in the US; Britain lacks the overhang of supply.
Still, The Economist wonders whether such special factors can maintain such a historically-abnormal price-to-earnings ratio forever.
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