MacroScope is pleased to post the following from guest blogger Simon Ward. Simon is chief economist of Henderson Global Investors in London and previously worked for New Star Asset Management and Lombard Street Research. His own blog is Money Moves Markets.

UK house prices are no longer expensive relative to a measure of "fair value" based on rents. Prices fell significantly below fair value during the major house price busts in the 1970s and 1990s but a big undershoot is unlikely in the current downturn because low interest rates will limit forced selling.

The notion that housing is no longer overvalued is controversial because the house price to income ratio remains far above its average since 1965. This average, however, is unlikely to be a good guide to fair value because the ratio has trended higher over time, reflecting factors such as improving quality, the pressure of an expanding population on constrained supply and a high income elasticity of demand for housing.

An alternative approach is to use rents rather than income as the basis of comparison. Rents already incorporate fundamental influences on housing demand and supply. People need to live somewhere – the choice is between buying your own home or renting, not between spending money on housing or retaining income for other purposes.

An economy-wide rental yield can be calculated from national accounts data by dividing the sum of actual rental payments and imputed rents of owner-occupiers by the value of the housing stock. The yield averaged 3.6 percent between 1965 and 2007. This seems low but the measure includes subsidised social housing and takes account of vacant properties.

The housing boom pushed the rental yield down to 2.8 percent at the end of 2007, suggesting that prices were then overvalued by about 29 percent, based on the 3.6 percent long-run average. The Halifax index has fallen by 21 percent since December 2007, while rents had grown 6 percent by the fourth quarter of last year. These changes imply a current yield of about 3.8 percent, consistent with small undervaluation.

The rental yield rose well above the 3.6 percent long-run average during prior housing busts. If the overshoot in the current downturn were to equal the undershoot during the boom, the yield would rise to 4.4 percent. This would be consistent with a further fall in prices of about 14 percent, assuming unchanged rents. A decline of this order is widely expected.

Such a scenario, however, is probably too pessimistic. A key difference from prior busts is the low level of mortgage interest rates, which is allowing many struggling borrowers to continue to service their loans. The Council of Mortgage Lenders last week reported that repossessions and arrears cases rose by less than feared in the first quarter. The CML intends to revise down its earlier forecast of 75,000 repossessions in 2009.

With less distressed selling, downward pressure on prices from rising supply is much smaller than in prior downturns. According to the Royal Institute of Chartered Surveyors, the number of unsold homes on the books of the average estate agent stood at 69 in April – far below peaks of 166 and 196 in the last two major housing downturns. Meanwhile, buyer enquiries have picked up recently.

Translating buyer interest into transactions depends critically on mortgage availability. The last Bank of England credit conditions survey reported tighter mortgage supply in early 2009 but expectations of an improvement in the spring. Signs of a stabilisation of prices could have a self-reinforcing effect by encouraging lenders to reduce current high deposit requirements, designed partly to protect against negative equity.

Of course, if house prices bottom at a smaller discount to fair value than in previous downturns, this also implies less scope for a significant recovery over the medium term. Moreover, an increase in supply may have been postponed rather than cancelled – "zombie" borrowers will have their life support turned off once the MPC starts raising interest rates.

House prices have dropped, interest rates are low and plenty of people are straining at the leash to get on the housing ladder.

Now the Nationwide Building Society says house prices have risen for the first time since October 2007. 

The Nationwide cautioned about jumping to conclusions on the basis of one month’s figures but the news was enough to send the pound up against the dollar and some analysts said it was more evidence that the battered housing market may be recovering. 

On the other hand mortgages have become much harder to get and rising unemployment is working against any recovery.

What do you think? Is it premature to start talking of green shoots in housing?

There was more gloomy news for the housing market today as property website Rightmove announced that asking prices for houses in England and Wales were 9 percent lower than a year ago. New listings meanwhile were 57 percent lower than March 2008. The average asking price actually increased by 0.9 percent between February and March this year, but Rightmove warned that this was caused by new sellers being unrealistic about how much their homes are worth.

So what can be done to revive the stagnant housing market? Citywire has one radical suggestion: make sellers pay stamp duty rather than the buyers. Every year there are calls to abolish or reform this “flawed tax”, but Citywire’s Lorna Bourke says that making this switch would be an incentive to first-time buyers and would cost the government nothing. What sellers would say about this, however, is another story.

Citywire also comments on the recent report by Numis Securities in which they said that house prices could have another 40-55 percent to fall before bottoming out. Ouch. David Smith, writing in this weekend’s The Sunday Times, dismissed this report as “unconvincing.” Smith writes that the chances of the average house price in the UK slipping to £66,000 from the current £150,000 are slim, especially as interest in the market and new buyer inquiries are rising.

The Numis report predicting the rather frightening fall in house prices has sparked a great deal of debate on the web; it is the most commented on article on thisismoney.co.uk.

Even if you did want to buy, what are your chances of securing a mortgage? Not good, according to Rupert Jones writing in the Observer. Fewer than 9,000 first-time buyers were able to take out a home loan during January and the average first-timer’s deposit was a new high of 24 percent of the value of the property. So while buyer inquiries may indeed be on the up, raising the finance to actually buy a property is becoming harder and harder.

And it could be about to get even more difficult. Telegraph.co.uk reports that home buyers could be prevented from borrowing more than three times their annual salaries under new mortgage rules to be announced by the Financial Services Authority.

All of which raises a number of important questions about you and your home. Is it a good time to sell or buy? Would you be better off renting? What sort of mortgage should you apply for? Thankfully, there are a number of great tools on the web to help you decide.

The Times has this handy mortgage calculator to calculate what your repayments would be were you to rent or buy. Moneysavingexpert.com meanwhile has a great tool which helps you decide if you should go for a fixed, discount or tracker mortgage for those of you looking to buy or remortgage.

If you want to know how much your home could be worth but can not be bothered dealing with an estate agent, then you can search the UK Land Registry database of houses sold in England and Wales since 2000 or find out more information about properties and monitor average house prices at the Land Registry website.

One thing looks to be sure this year - the housing market has further to fall. Some of the gloomiest predictions are for a further 20 percent slump before a recovery may set in.

Our own Reuters poll of 37 analysts at UK banks, published today, predicts that prices are likely to drop by about 11 percent this year and that it will take until 2010 before it gets better.

How much do you think house prices will fall in 2009?

It’s every houseowner’s worst nightmare - and it’s official now: more than a million households could fall into negative equity if the housing slump continues, the Bank of England said today.

Growing numbers of home owners could be forced to sell their properties at a loss, as the property downturn gathers pace and vendors run out of options.

The scope of the negative equity nightmare could be massive. The BoE said that a 15 percent drop in prices from their October 2007 peak would leave one in 10 homeowners with outstanding mortgage debt worth more than the value of their home. Earlier this week the Centre for Economics and Business research predicted  that the average cost of a UK home will fall up to 40,000 pounds by the end of 2009.

First-time buyers are among those hardest hit and buy-to-let landlords may fall behind on mortgage payments or may be forced to sell at a loss as lending dries up.

And if that’s not gloomy enough - two further sets of figures provided more bleak news for the housing market on Tuesday.

The Financial Services Authority said the number of home repossessions in the second quarter rose to 11,054 from 9,172 in the previous three months. And according to the Land Registry, the average price of a house in September was 168,814 pounds, down another 2.2 percent on the month, a far cry from around  200,000 pounds seen at the peak last summer.

How have you been affected by the downturn in the housing market? Have you even been affected by negative equity, either now or in the past?

When exactly the housing market will recover is anyone’s guess and gloomy predictions abound. One academic says it even could take as long as 15 years.

Andrew Clare, a professor of asset management at Cass Business School in London, used futures contracts based on the Halifax house price index to figure out his dire prediction. He calculated that in 2010 the average will be 40 percent lower than the peak of 199,600 pounds in August last year - about 120,000 pounds.

That’s particularly bad news for those who bought a house last summer, and Clare predicts that negative equity will be “a big feature of our economic landscape for years to come.”

The Halifax said last week house prices dropped at their fastest rate in September since records were first kept 25 years ago, with the average average price down 13.3 percent.

• You know exactly what the population of Iceland is and can also pronounce the name of its prime minister.
• Even the word ‘crisis’ seems to have lost its currency.
• Countries pop up for sale on eBay for 99p and get few offers.
• Posters on BBC messageboards stop discussing the undulating pitch of Robert Peston’s voice and listen to what he’s actually saying.
• The speech bubble on Page 3 of the Sun is given over to discussing the credit crisis.
• Financial market updates displace stories about Jade Goody on the tabloid front pages.
• Bad news stories from government departments are rushed out day after day and not even the Opposition seems to notice.
• Estate agents finally admit house prices have fallen but tell you now is a really great time to buy because the market is stabilising.
• People marketing get-rich-quick property seminars don’t get taken seriously any more.
• The Chancellor, writing in the Financial Times, says that “now, more than ever, we need new ideas”.
• Your primary school-aged children know that credit crunch is not a type of biscuit and that IMF isn’t just a fictional organisation in Mission Impossible.
• You go for a while without noticing one estate agent’s mini and then you see a whole bunch of them on the back of a car transporter.
• A pensioner on the evening tube train from Canary Wharf gives up her seat to a banker because she reckons he might need it.
• The Ivy rings to ask if you’d like a table tonight or any night.
• There are no spare trolleys when you turn up at Aldi to do your weekly shop.

Do you have any better suggestions? All contributions welcome - please send in your selection.

Credit crunch, surging food prices, rising unemployment, house prices tumbling, maybe even a recession …. isn’t it all enough to make you feel miserable? And I’m not even mentioning the dismal British summer weather.

And all that desolation can be measured - the Misery Index is a financial pain barometer measured by adding the rate of inflation to the unemployment level.

Financial Web site Money Morning points out in a note that it now stands at a 12-year-high of 9.8 percent in Britain (consumer price inflation of 4.4 percent plus unemployment rate of 5.4 percent).

Not the most scientific approach but the index’s founder, American economist Arthur Okun, based it on the assumption that a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. Some analysts also argue that the rate of crime and the misery index correlate strongly.

During the Presidential campaign of 1976, Democratic candidate Jimmy Carter made frequent references to the Misery Index, which by the summer of 1976 was at 13.57 percent. Carter stated that no man responsible for giving a country a misery index that high, had a right to even ask to be President. The remark may have haunted him somewhat as four years later it had soared to 22 percent and Ronald Reagan won the election.

While 22 percent sounds high, spare a thought for the British consumer. Money Morning points out that in the summer of 1974, the UK Misery Index climbed well into the 30s, as annual inflation topped 26 percent and the country was hit by the three-day week. Then after a hitting a low of 13 percent by mid-1978, the index took off again after the “Winter of Discontent”, reaching 26 in the early months of Margaret Thatcher’s reign as Prime Minister.

More gloom and doom to come - is it all getting too much? You could try and listen to Baltimore-based death metal band “Misery Index” with its anti-consumerist lyrics or buy one of their T-shirts stating that “Ignorance is Bliss”.

Forget everything you’ve heard about the looming property crash.

In the midst of dire warnings about collapsing house prices comes a lone voice offering a crumb of comfort for hard-pressed homeowners.

A report by the National Housing Federation says that far from falling off a cliff, house prices could actually rise by a quarter by 2013.

It says demand for homes is rising because people are living longer, delaying getting married and are more likely to divorce.

Nearly 1.7 million people are on waiting lists for public housing and thousands of first-time buyers are saving up to buy a home, it says.

“As soon as the economic outlook improves house prices will resume their previous upward trajectory,” said the federation’s Chief Executive David Orr.

The Federation also says the supply of new homes still lags behind demand.

Not everyone agrees, however.

A report by Deloitte this week forecast that house prices will fall by a third and that the slump will last until 2010.

Inflation, shrinking incomes and the economic downturn will all take their toll, it said.

Where do you think the market is heading? Do you expect the price of your house to rise or fall in the next few years?