In the fourth quarter of last year, the average house price to earnings ratio in the UK was about 8.4x. Apparently this is about as high as it has been in the past 120 years. But interestingly enough, if you go back to the 19th century, this ratio was even higher. It was over 12x back in 1845, but then went on a steady decline until about the 1920s. What changed, according to some researchers, is three things: homes got smaller (making them more affordable), incomes rose, and supply increased.

So what's going on today? The obvious answer is perhaps that interest rates are low. But in this recent FT article by Martin Wolf, he argues that that's not really the primary driver. Part of his logic is that low interest rates are a global phenomenon. And so how is it that real home prices in the UK rose 93% between 2000 and 2020, but only 29% in Germany? There must be some other structural force(s) at work. (Germany has a lower homeownership rate for whatever that's worth.)

Wolf argues that it's a problem of housing supply. Very little housing was built during WW2, for obvious reasons, but housing delivery did really spike in the post-war period in the UK. Local authorities also played a major role. If completions from 2000 to 2019 had averaged the same rate seen between 1950 and 1970, the country would have 2.9 million more homes today, representing a 13% increase to total dwelling count.

This, Wolf argues, would be having an impact on house price dynamics.

Chart: Financial Times