Interest rates in the UK are higher than Germany’s and the rental yields are much lower.

For several years now, I thought UK property was grossly overvalued and primed for a fall. However, using a gross simplification I have recently formed a new model of the UK housing market. My thinking is quite simple.

Over the long-term, house prices seem to keep up with inflation (let's say two to three percent per year). Current net yields in the UK are around four percent.

As a long-term investment, it may make sense to accept a low yield on the rental because of the long-term inflation hedge component. Thus the rental yield should perhaps be compared to the real interest rate, not the nominal rate. On this basis, houses in the UK may be fairly valued. I wonder whether Joe Public is walking around with such a model in his head?


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