Year after year, the historic ratios have provided a strong indication of which the main investment asset classes are undervalued and which are overvalued, as regular readers of our annual historic ratio series of articles will know.
Well, after calculating the historic ratios for property prices in every region of the UK, compared to the UK average, it turns out that this form of analysis also offers some strong clues as to which region could ‘play catch-up’ with the rest of the UK over the next five years, and which will have to ‘make an adjustment’ to realign with the historic average ratio to the UK property price.
To obtain the historical average ratio, I used data from the Nationwide House Price Index (HPI) and using the most recent quarterly prices (end of Q2 2023) I then looked at the ratio for each region (compared to the UK average property price), going back five years at a time; so Q2 2018, then Q2 2013 etc., all the way back to 1973 (I used Q4 data for that year), which is when Nationwide started its HPI. This gave a total of 10 ratios for each region, going back for 50 years. Had I simply just taken the average price per quarter and compared the regions, the figures would have been far more skewed towards the most recent (and much higher) property prices, hence why I chose the former method.
In this article, I will go through each region, from the most overvalued to the most undervalued, and in some cases give examples of how the property price ratio has been a strong indicator of price movement in the following years.
If you are the type of person that ventures into the lower tray of the chocolate box on Christmas Day before the top tray has been eaten, then you can jump straight to the table at the bottom of the article. Right, let’s get started.
London: Overvalued by 23%
Property prices in the capital should be 60% more than the UK average (a ratio of 1.60). The ratio was in the 1.60s in 2003 and 2008 but after the Bank of England slashed the base rate to close to zero percent, thereby creating ‘free money’ for many wannabe homeowners, the lure of buying a home in London instead of renting was strong, combined with a collapsing British pound versus most other global currencies, which resulted in a rise in overseas property investors buying in