The biggest threat to UK house prices: a eurozone recovery

It looks as though house prices in Britain might be heading downhill again.

Recent figures from both Nationwide and Halifax suggest that prices are under pressure. Nationwide reckons that prices fell by 2.6% year-on-year in July, the worst fall in three years. Halifax also saw prices drop in July, registering an annual fall of 0.6%.

Is this just the usual volatility we’ve grown used to since the financial crisis kicked off?

Or is there more to it this time?

House prices have already slid in many parts of the country

It’s perhaps no surprise that house prices seem to have been weakening of late. We’re firmly in recession after all. And other indicators suggest that demand has been dropping off.

The number of mortgage approvals fell to an 18-month low in June. Also, the number of new buyers in the market slipped for the second month in a row, according to the Royal Institution of Chartered Surveyors.

That sounds like a recipe for lower house prices. But as Capital Economics points out, weak demand is being met with a drop in the number of homes being put on the market. This “argues against a rapid price correction”.

See also

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Also, the government has introduced its ‘Funding for Lending’ scheme. This is where it makes cheap loans available to the banks as long as they use the money to lend to consumers and businesses.

Overall, Capital reckons that prices will fall by around 5% this year.

That would be helpful. Prices in Britain remain far too expensive. It’s silly to view the high cost of shelter as being any more of a positive thing, than a high petrol price, or more costly heating bills.

However, there is another factor to consider that could potentially see prices fall more rapidly.

It’s important to realise that outside of London and the south of England, house prices have fallen pretty hard already in many areas. Northern Ireland has been by far the worst hit. In the second quarter of this year, prices were down 10.6% on last year, according to Nationwide.

That’s an unusually brutal fall. But in Wales for example, prices were down 5.3%. Scotland and the north of England have seen prices fall by around 2-4% (depending on where you look).

In other words, it’s largely the south of England and London that have seen gains or at least been flat.

The flood of scared money rushing into London

So what’s driving that? One key factor has been the flood of money from Europe seeking a safe place to invest. This money is running scared. All this money cares about is getting out of its host country broadly intact. It is almost entirely price-insensitive.

So this is not value-seeking money. This money is happy to overpay for an asset, as long as it offers a relatively high level of capital protection. This is the sort of money that is driving up the price of gilts to the point where they yield less than nothing after you take account of inflation.

This money does not give a damn about the state of the UK economy. It’s just happy to know that British society will still be there in roughly the same overall shape in ten years’ time.

This sounds mad during normal times, but it makes perfect sense now. If I lived in Greece, I would be willing to take a pretty hefty ‘haircut’ to transfer my wealth into sterling assets.

Why? Because if my Greek euros turn into drachma, then for all I know, I could be looking at a loss of 50% or more. And if the government stops me from taking my money out of the country, it’ll be vulnerable to punitive taxation.

This isn’t theoretical. Theodoros Pantalakis, former chief executive of the Agricultural Bank in Greece, bought a London property in 2011. He used €8m to do it. There’s nothing illegal about what he did, but you do have to question the ethics of yanking your savings out of the country, while your fellow Greeks are sticking their savings into your bank.

The point about this flood of money is that it’s a temporary factor. Yes London is a wonderful city for the super-rich, I’m sure. And the Olympics is presenting it in a very favourable light. But if Europe wasn’t in quite such a mess, there simply wouldn’t be the same level of ‘safe haven’ flows into the region.

So chances are, once the European Central Bank (ECB) starts printing money, then at least some of the safe haven flow will reverse. At the very least, the amount of money fleeing the eurozone will slow down.

That could be great news for lots of assets, particularly cheap stocks in Europe. But it’ll also be bad news for the assets that have benefited from all that ‘scared’ money. Suddenly a prime property in London will look expensive, rather than a low-risk way to shift a lot of cash quickly.

So ironically, the biggest threat to the UK housing market could be any sign of a recovery in Europe. The good news is, at least you can profit from this. We’ve already looked at various ways to cash in on any money-printing in Europe, and we’ll be looking at more in the next issue of MoneyWeek, out on Friday. (If you’re not already a subscriber, get your first three issues free here.)

Don’t bank on Funding for Lending

As for the ‘Funding for Lending’ scheme, as far as I can see, banks are likely to use that to launch more mortgages aimed at people with lots of equity in their homes. So if you already own half of your home, you’ll be swamped with offers to remortgage at ever-lower rates.

That’s because the bank knows you probably won’t default. And if you do, they’ll definitely make a profit when they repossess your house, because they’ve only loaned you half its value.

But if you’re a first-time buyer (or a small business), forget about it. And if you’re a saver you should also be irritated. If banks can get cheap funding elsewhere, they’ll stop competing for your business. So you can expect interest rates on savings accounts to be lower than they would otherwise be. Yet another reason to be fed up with bank bail-out schemes.

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26 Responses

  1. 07/08/2012, NVP wrote

    Can someone tell the West Sussex “Daily Mail brigade” that prices are falling ?

    I have been trying to purchase a decent detatched property with some land for over a year now in this area and they just wont come off the pot with decent negociated reductions on current Asking prices

    Jees…..role on the EURO printing presses !

    NVP

  2. 07/08/2012, James Smith wrote

    Since when was the price of anything going down a bad thing…especially housing !!!!

  3. 07/08/2012, BobR wrote

    “you do have to question the ethics of yanking your savings out of the country, while your fellow Greeks are sticking their savings into your bank”

    Oh really? How about the ethics of the BoE pension scheme going heavily into IL Gilts just before they start screwing the entire savings and pensions community with historically low interest rates? Self protection is human nature – even more so for banksters of whatever nationality!

  4. 07/08/2012, Ian wrote

    Can you please do a piece on ” money laundering” ,I mean
    The banks seem to get away with what ever they want…HSBC..in Mexico , and you have to question any other areas in the world ? This yesterday we have Standard Chartered . Yet more normal mortals in this country have to
    Jump through all kinds of hoops to buy a house here, yet most Euro people have no where near the trouble or the paper trail interrogation , even in Germany, and Greece, well
    According to a surveyor , the Average lump of Cash coming in here is , wait for it 6,000,000 , and it goes straight into ,
    As John say’s into houses, no questions asked at all ?
    Ian

  5. 07/08/2012, Daikoku Research wrote

    This is one area where government needs to take a firm lead and introduce housing policy which has longevity. Unfortunately the minister responsible for housing, under any government, is just the last one through the revolving door and will be the first one out of this undesirable brief. There is solid evidence (see WECH for example) that progressive management of housing stocks reduces tax payer burdens in health, education, policing and environmental costs. However such an holistic approach to housing and taking the view of housing as infrastructure never evolves in policy terms because of entrenched vested interest.

    Bringing down housing prices to realistic levels, reining in estate agents and progressing holistic long term housing policies would help to stimulate Britain and help to drag her out of the mid twentieth century and into the twenty-first. Inevitably this would require perception and insight from politicians and that is where any idea of progress fails miserably.

  6. 07/08/2012, Orb wrote

    I priced up the cost of the cheapest mortgage I could find last night to see if it’s time to buy again yet: 3.7% (3.1% above ‘Abby’ rate)! That puts the interest cost value of the property at a frac below the rental cost…. before maintenance, refurb & other purchase related costs.

    6 years ago, the best rate on offer was 0.24% above BoE; the rate we have on our life tracker (3.5 yrs old now) is 0.99% above BoE (still can’t sell our property at the purchase price paid 9 years ago!)

    What a mistake it was for Brown to ‘save’ these broken institutions. If they’d been left to go to the wall, house prices might be realistic again and we might have had some competitive offers out there now.

    I’ll stick to renting for the time being and saving the difference….

    Boris? Renting? Dead money?

  7. 07/08/2012, Elvis Presley wrote

    John, you might also mention the relative cost of property in the rest of Europe; if London/SE looks expensive relative to the rest of the UK, as property falls in price over the rest of Europe, the prices in London will look even more unsustainable.

  8. 07/08/2012, Graham W wrote

    We all know house prices have been due for a fall for some time – bring it on – it will help “most” people who own a house looking to move or most people trying to get on the market – less stamp duty, less debt and less fees for estate agents.

  9. 07/08/2012, Long Jhon Silver wrote

    “The UK will be much the same in ten years”. Time stands still for no man. UK government excepted. In ten years the UK will be ten years further into debt. Make a graph of UK borrowing over the last 30 years. Then follow the path /growth line and take a tablet.

  10. 07/08/2012, Bill Lawler wrote

    John makes a comment about the fact that the banks won’t mind if you default on your mortgage as they’ll make a profit anyway as they’ve only loaned half its value. I don’t think that’s actually true in that after repossessing a property and selling it any ‘profit’ after repayment of the mortgage and associated fees would need to be returned to the original owner.

  11. 07/08/2012, Krumbles wrote

    >> If I lived in Greece, I would be willing to take a pretty hefty ‘haircut’ to transfer my wealth into sterling assets.

    That explains why they’re buying UK assets, but I still don’t get why they’re interested in buying overpriced houses in London.

  12. 07/08/2012, Boris MacDonut wrote

    #6 Orb . At the risk of repeating myself. In the short term the long term always wins. House prices are up 51% in tha last 10 years, 207% in the last 20 years, 680% in the last 30 years and 2,900% in the last 40 years. I am not so foolish as to try to predict the future based on the past (like post 9 trys to do), but most indicators point to another 25 to 30% HP rise by 2022,with personal debt levels easing upwards by around 16% only.

  13. 07/08/2012, Wim Dit wrote

    Seems to me that people who might well be in the market for a house move are put off by the cost of it all.
    Three per cent on a purchase above £300,000 is an awful lot of dead-money (tax), if you are struggling to improve your lot with a young family – I know of several examples – families faced with this who say it is just not worth the move.
    You might say these people have “never had it so good” anyway — well, that’s as maybe, but if the government cannot see this area of the market is a bottle-neck that needs to be relieved, then the whole market will remain stagnant.

  14. 07/08/2012, Dream Jeanie wrote

    If the recovery of the euro zone is the biggest threat to house prices in the UK, then Boris MacDonut has been right all along. Living in the supposed strongest part of the euro zone (Germany), the prospects of any sort of improvement in the euro zone look unlikely from here and the prospects of a further deterioration look like a sure bet as Germany itself experiences increasing problems.

  15. 07/08/2012, Beta adjusted wrote

    Rate of increase of public debt due to deficit less ‘real’ rate of inflation = ? is the UK debt still going up in real terms? or is ‘financial repression’ successful? (so far!!). A view from moneyweek on this would be of interest. Can we have an article explaining the different types of debt, and why the situation in the UK is so bad, and a comparisson between our EU neighbours and the US? A realistic projection in ‘real’ terms of debt-levels would be very very interesting.

  16. 07/08/2012, Orb wrote

    Boris, yes, I’m aware of your view.

    “House prices are up 51% in tha last 10 years…”

    Perhaps we are just unlucky? After a year on the market, we had a best offer last week: £1k UNDER the price we paid for it in April 9 years ago! And it sure as hell didn’t rise 50% in the single year before we bought it!

    Perhaps it just brings home that there really is a BIG divide between Ldn & the south east and the rest of the country.

    Anyway, what a bunch of idiots: I’d have sunk my Euro’s into gold – far more secure, far less vulnerable to the whims of an unpredictable currency and far more liquid!

    And I don’t think prices will crash, just stagnate for the next decade or two; i.e. a zero rate nominal return, just like Japan.

  17. 07/08/2012, Jim wrote

    The biggest threat to house prices is when the world wakes up to the huge personal debt in this country (6 x GDP by some estimates) not to mention goverment debt.

    We are not the USA or Japan, we are now the 6th or 7th biggest economy in the world. Recovery is just not happening and the BoE are printing like there’s no tomorrow.

    Evenually there will be a run on the £ and a sell off in the bond market. Which will in turn push up mortgate rates crashing house prices( 40% of mortgages are now on SVR) . Impossible to time but its coming in the next few years.

  18. 07/08/2012, Daisy wrote

    5. Daikoku Research
    Well said number 5.

  19. 07/08/2012, Boris MacDonut wrote

    #16 Orb.You are very unlucky as HP’s are up by 34% since 2003.

  20. 07/08/2012, Orb wrote

    Boris, is that national average (incl. London & the SE)? Or just London & the SE? Or what about Wales, or the Midlands? & Scotland?

  21. 07/08/2012, Boris MacDonut wrote

    #20 Orb. It is national average . So sadly you overpaid in 2003.Probably like amny ,you thought prices would go on rising forever. That is a basic mistake. Prices do fluctuate bu the trend is always upwards. Always.

  22. 08/08/2012, lornestloyal wrote

    Boris – The inflation index between 2003 and present is 28%. £100K should now cost £128K. So 34% house price increase nets you £134K. So if the cost of maintaining my asset for 9 years is less than £6K….oh dear, that new kitchen the missus wanted, the broken gate, the new carpet after the dog threw up… reckon I’m about £31.50 up. Woo Hoo!

  23. 08/08/2012, Orb wrote

    Boris, national average? Ok… so what happens if you strip out Ldn & the SE from that? Oh, nevermind, I can see this tedious debate is going nowhere. I bet you’re one of those old schoolers who says “The stock markets are the best way to grow your wealth!”

    I acknowledge you’ve shared a lot of wisdom on these pages, but perhaps sometimes statistics don’t provide the answers to all questions?

    PS: Our house purchase was more a need for a home (not ‘house’), which is reason enough to question your logic on this one. It seemed obvious a correction was coming when in 2004 inflation was 2%, salary increases 3% and house price increases 12%! While I had no interest in financial markets at the time, it didn’t take a genius to work it out. We didn’t sell for the reasons you give: “Over the long term….”

  24. 08/08/2012, Paul, Tw2 wrote

    Boris, your constant defence and deisre for house price rises is long in the teeth. Are you an overleveraged landlord? Or did you buy in 2007? “house prices are up 51% in the last 10 years” When you factor in inflation, the value of sterling in that period its nowhere near as attractive as you make it sound. You would have been better off buying gold.

    You predict rises of 25-33% to 2022? At a time of deep recession, low wage growth, job insecurity and high unemployment, tight credit lending, high inflation? Its hardly a platform for property values to rise. This when base rates are at historical lows!

    Anyway theres probably no reasoning with you, brainwashed, when London bubble bursts, we will see a real correction. I live in a good part of London, property is wildly overpriced, 8-10 times earnings for a 1/2 bed flat, insanity. As a ftb, i will not be buying at these levels, and judging by the woefull mortage approvals and transaction statistics, im not the only one…….

  25. 08/08/2012, BoredBear wrote

    Does the author live in London in some media bubble, surrounded by the worlds “elite” ?

    London is not representative of the UK at all. QED.

  26. 08/08/2012, mike wrote

    who really thinks a few EZ buyers have actually done anything to UK house prices?
    not me-

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