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MARKET COMMENT
By
Carburton Street, London -- An average house is worth 7.7% more today than it was this time last year. According to the Nationwide Building Society's survey of house prices, the average price of a home in the UK now stands at £87,267 and Nationwide expects prices to rise another 7% this year. The house price ratio, which is a measure of the number of years of annual income needed to buy a home, currently stands at 3.7. This is in line with the historical average and is often used as a measure of affordability. But interest rates are now lower than they have been for the last twenty years and with lower mortgage payments, housing is more affordable now than in the past. By inference, price increases should be underpinned as long as interest rates remain low. The house price income ratio in London stands at 5, making housing in London 35% more expensive than the rest of the country. The ratio is still lower than the peak value of 6.3, which was reached in the late eighties. Based on this assessment, Nationwide does not expect a violent correction in London house prices. A frequently asked question by investors is whether investing in property outperforms an investment in the stock market. Nationwide provided some additional data going back to 1974 when the average price of a home stood at £10,027. Over the twenty-seven year period, this would represent an increase of 8% a year compounded. Over this same period, an investment in the stock market would have appreciated at an average of 17% a year. There is a popular belief that property is a better investment than shares. Today's report from the Nationwide Building Society provides further evidence that this is unlikely to be the case. It should be remembered that house price indices should be taken with a liberal pinch of salt because they tend to be biased towards the upside. This is because only houses that have been sold count towards the calculation of the index, and property owners are unlikely to sell below their purchase price. Nor does the index include the additional costs of maintaining the property.