I'll regret saying it but housing troubles are resurfacing
Over the years the housing market has been one of my favourite subjects – and one that has provided rich pickings for my critics. It is time to face their ire again.
Wishful thinking? Mortgage approvals have been low all year.
Last week's Nationwide house price figures showed a second successive monthly fall, this time of 0.9pc. What's more, this data followed other signs of weakness. Mortgage approvals for house purchase have been low all year, while the RICS new buyer enquiries balance has been negative for the past two months. Could the market be on the turn?
Lower house prices would make a lot of economic sense. In the UK, as in the US, a surge in house prices was right at the centre of the wider economic boom which ultimately ended in the financial crisis.
Since then, most asset markets have undergone a major adjustment. In the US, even though the housing market never got as overvalued as ours did, house prices fell by 32pc. In the UK commercial property prices fell by about 45pc. Equities fell by about 50pc, and still stand 20pc below their peak. The pound fell by about 25pc. Although average UK house prices initially fell by 20pc, they then recovered and currently stand only about 10pc below their highs. So the UK housing market sticks out like a sore thumb.
Since then, most asset markets have undergone a major adjustment. In the US, even though the housing market never got as overvalued as ours did, house prices fell by 32pc. In the UK commercial property prices fell by about 45pc. Equities fell by about 50pc, and still stand 20pc below their peak. The pound fell by about 25pc. Although average UK house prices initially fell by 20pc, they then recovered and currently stand only about 10pc below their highs. So the UK housing market sticks out like a sore thumb.
Moreover, as a multiple of earnings, average house prices are, at 5.2, way above the long-term average of 3.7. Admittedly, this indicator has been flashing red for ages. And measures of so-called affordability – the ratio of mortgage payments to take-home pay – show no sign of undue strain. Mind you, if housing is not affordable when official interest rates are at virtually zero then when will it be? My view is that official interest rates will stay at this level for ages. But at some point they will go up to something like 5pc, probably taking mortgage rates to about 7pc. At current prices, how affordable would housing be then? In any case, many potential buyers find that even if they can afford the mortgage payments they cannot save enough to meet the now larger deposit requirements.
Nevertheless, movements in house prices need a catalyst. There are a few candidates. Mortgage availability is getting tighter as lenders wake up to the risks, face closer regulation and anticipate the imminent expiry of the Bank of England's special liquidity scheme.
Meanwhile, the pressure on personal finances is set to intensify as the rate of increase of average earnings edges down, higher taxes reduce disposable income and job losses in the public sector both reduce total personal incomes and erode confidence about job security. At the top of the market in London, support from foreign buying in the wake of sterling's collapse has softened as sterling has recovered. The higher rate of income tax and continued doubts about the outlook for the City point in the same direction.
That said, there are no certainties. The housing market has seen false dusks before. This could be another one. Because of low interest rates, it is possible the market will hold these levels and that housing is eventually returned to reasonable value by the continual upward march of salaries, rents and the general price level. But I doubt it. The issue is whether the market falls sooner or later.
So bring on the ire. (You know who you are!) Doubtless I shall soon be told that there is no such thing as "the" housing market but rather umpteen micro markets, or that I have forgotten about supply and demand. (A pretty bruising criticism to an economist.) Or that I have ignored the fact that we are a small island, that we don't build enough houses and that Aunt Mabel is set to remain in her three bedroomed semi, despite having a gammy leg etc.
Let me say that the average level of house prices is determined by the balance of supply and demand. But the supply is the stock of houses, and that stock does not change much from year to year. So movements in prices from one year to the next are principally caused by shifts in demand. And demand does not mean the airy aspiration to live somewhere nice, or the "need" for housing, neither of which has any economic content. Rather, it means the willingness and ability to pay the going price.
Ability is affected by income, interest rates and the availability of credit. Willingness is affected by many things but one of them is what people think will happen to prices in future. Like other asset markets, therefore, housing is subject to a substantial speculative influence. If prices are expected to fall then much "demand" which was present when prices were expected to rise will evaporate. I suspect that both the ability and the willingness are about to fall.
roger.bootle@capitaleconomics.com
Roger Bootle is managing
director of Capital Economics
and economic adviser to Deloitte
Nevertheless, movements in house prices need a catalyst. There are a few candidates. Mortgage availability is getting tighter as lenders wake up to the risks, face closer regulation and anticipate the imminent expiry of the Bank of England's special liquidity scheme.
Meanwhile, the pressure on personal finances is set to intensify as the rate of increase of average earnings edges down, higher taxes reduce disposable income and job losses in the public sector both reduce total personal incomes and erode confidence about job security. At the top of the market in London, support from foreign buying in the wake of sterling's collapse has softened as sterling has recovered. The higher rate of income tax and continued doubts about the outlook for the City point in the same direction.
That said, there are no certainties. The housing market has seen false dusks before. This could be another one. Because of low interest rates, it is possible the market will hold these levels and that housing is eventually returned to reasonable value by the continual upward march of salaries, rents and the general price level. But I doubt it. The issue is whether the market falls sooner or later.
So bring on the ire. (You know who you are!) Doubtless I shall soon be told that there is no such thing as "the" housing market but rather umpteen micro markets, or that I have forgotten about supply and demand. (A pretty bruising criticism to an economist.) Or that I have ignored the fact that we are a small island, that we don't build enough houses and that Aunt Mabel is set to remain in her three bedroomed semi, despite having a gammy leg etc.
Let me say that the average level of house prices is determined by the balance of supply and demand. But the supply is the stock of houses, and that stock does not change much from year to year. So movements in prices from one year to the next are principally caused by shifts in demand. And demand does not mean the airy aspiration to live somewhere nice, or the "need" for housing, neither of which has any economic content. Rather, it means the willingness and ability to pay the going price.
Ability is affected by income, interest rates and the availability of credit. Willingness is affected by many things but one of them is what people think will happen to prices in future. Like other asset markets, therefore, housing is subject to a substantial speculative influence. If prices are expected to fall then much "demand" which was present when prices were expected to rise will evaporate. I suspect that both the ability and the willingness are about to fall.
roger.bootle@capitaleconomics.com
Roger Bootle is managing
director of Capital Economics
and economic adviser to Deloitte
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