Don’t speak too soon – but the housing bubble may be peaking

A friend of mine just put her (nice) two-bed flat in Kingston on the market for a price she thought was silly.

It was first shown on a Saturday. Over 70 people came to view it.

The following Monday, she had 18 offers at or above the asking price.

Great for owners and sellers, depressing for buyers, these kinds of stories are all too common. The question we have to ask is: when will the madness end?

Nobody knows the answer to that, but I have a tiny carrot to dangle in today’s Money Morning, which might bring a little solace to buyers.

The housing market is rigged in favour of owners

There is probably no greater manifestation of the wealth divide in the UK than the housing market.

In fact, it’s more bizarrely specific than that. There are those that own a house in London and those that don’t.

Ignoring how things have gone at work or with their other investments, those that own a decent pad in London have more than doubled their wealth over the last three years without having had to make a single improvement to the property. They could have scrawled all over the walls and worse. It wouldn’t have made any difference.

An ordinary terraced house, for example, that was half a million in 2010 is now not far off a million. What was a million is close to two. Add in the leverage of a mortgage and most people have doubled their wealth or more.

This wealth divide will remain for as long as interest rates are suppressed, inflation is not measured properly and planning laws remain as they are. In fact, thanks to Help To Buy and other schemes by which the housing market has been propped up, the government now almost has a responsibility to maintain high house prices in the future.

So things looked pretty rigged in favour of owners.

Housebuilders are warning of a potential peak in house prices

That said, I like to watch the house builders. By that I mean the likes of Barratt (LSE: BDEV), Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW). They have, over the years proven to be reliable indicators as to the future direction of house prices.

And here’s the thing – their share prices have turned down. In fact, the whole household goods and home construction sector has turned down.

It might not mean much. It’s early days. But there’s a small chance it could be the start of something bigger.

Here’s a chart of UK house prices since the mid-1980s from Nationwide.

Long-term housing market graph

You can see the boom of the 1980s, followed by the bust of 1989-94. Then we had the ‘saucer’ bottom of the mid-‘90s. This was followed by a multi-year bull market, which got started in about 1996-97 and peaked in 2007-8.

As we all know, London fell by much less than the rest of the UK post-2008. It also made its post-crash low sooner and began its subsequent rise faster. In the first quarter of 2014 alone, London saw annual house price inflation of 18%.

Now let’s look at a log chart of Barratt, the UK’s largest homebuilder, since 1989 (a log chart shows the magnitude of change – so on the y-axis, the distance between 100p and 200p is the same as the distance between 200p and 400p). If you compare the two, it’s  house prices on steroids.

Barrett share price chart

First, note the crash of 1989-94. You can see Barratt made its crash low in 1991, and re-tested it in 1992. That was two years or more before house prices actually bottomed. Between 1991 and late 1993, the share price appreciated by ten times (from 29p to 300p).

Through the rest of the ‘90s, Barratt traded in a range between about 150p and 375p. It made panicky spike downs in 1998 and 1999-2000 (both of which proved to be bear traps) before setting off on another run that would see it appreciate by another ten times by 2007, when it touched 1,300p.

There were slight wobbles in the housing market after 2000 and again in 2004-6. Barratt anticipated both of these, as well as the crazy rise to an eventual peak in late 2007 – early 2008.

Then we got the bust of 2008, the bounce, the re-tests in 2010 and 2011 – and the surge we have just seen. (The guy who bought in 2008 and sold in January this year made ten times his money again.)

In each move, Barratt has been ahead of the housing market. Intraday, Barratt actually peaked in 2006 and retested that peak in February 2007, while house prices themselves peaked in late 2007.

So, to 2014. Having been as high as 450p in early March, Barratt touched 360p on Monday. That’s a fall of more than 20%. In other words, it’s bear market territory.

The shorter-term moving averages have turned down (the blue and yellow lines in the chart below) and Barratt’s price is below them. It is heading down towards its one-year moving average (the red line).

Barrett share price chart

One reading of this is that a trend is forming – and it is pointing lower.

And as I already noted, the household goods and homebuilding sector is also pointing lower, as we can see below. This sector actually peaked in late February.

House-building sector price chart

The big surge in London prices could be over

I’m not predicting that this is the start of a housing bust. There is too much vested interest propping it up, not least from the army of buy-to-letters in the House of Commons. And neither Barratt nor the house-building sector are even at 2014 lows yet.

But, as I often say, trends are remarkable things. They can go on for a long time – and there are early signs that one is forming. The way the prices of Barratt and its fellow homebuilders go in the coming months will tell us a great deal about where housing is heading.

Given that every other article you read in the papers is about high house prices, I’m inclined to think we have a hit a peak in hype. I doubt we crash from here. But I do think things could settle and that we head into a period of sideways action, rather as we saw in the mid ‘90s, over the next year or three.

If London prices instead continue to appreciate at the rate they’ve done over the past two years, then serious social problems lie ahead for the capital.

For those of you that are interested in how yours truly has played the housing market over the past couple of years, I joined the river folk and lived on a barge in Canary Wharf, which I rather enjoyed. Very glamorous indeed, it was. Just last week, I moved back onto dry land – for reasons I shall tell you about another time.

• Dominic Frisby is crowd-funding his latest book, Bitcoin – the Future of Money. His first book, Life After The State, is available at Amazon. An audiobook version is available here.

• Follow @dominicfrisby on Twitter.

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  • Paul Claireaux

    Useful article.
    I think a focus on prices relative to earnings can help too.
    See here

  • Confucius

    Well said Rabster, it’s blindingly obvious to anyone who lives in the shires. And you couldn’t have been more accurate if you’d spent all week composing your response.

    Chartists and readers of tea leaves!

  • Property Match

    I agree and would like to add the likely reason for the creation of the super-bubble and how best to resolve it.
    I blame the agents, for badly misreading housing market dynamics and then gaining easy support by advising the all too hopeful vendors.

    My theory is in part based on stats like the ONS ones, just published saying that the supply of properties for sale nationally is down 12% year on year, and down 48% since March 2008. It’s to do with the way houses are marketed. It’s not because house-owners don’t want, or need, to move house these days.

    The whole thing is now out of control and right out of phase with the rest of the UK economy. The opportunities for correcting this have been duly missed, exactly as the opportunities to correct our nation’s finances, which existed before the banking collapse.

    All that can happen now, is house owners must experience an ongoing, natural correction in market prices, to bring them more into accord with general economic indicators. This must happen, irrespective of any tactics employed after the fact by The Treasury.

    A case in point which proved this hypothesis occurred in Southern Ireland, where whole estates of newly built houses were left to rot and decay, uninhabited and unloved as a result of the lack of wealth their inhabitants encountered as the Euro crashed. These problems are still working their way through the system over there.

    Britain itself is, contrary to the views of come commentators, yet to come out of this unscathed. The fact that money is coming here from a small number of relatively rich investors from abroad is actually confirmation that things are not good. Money from abroad won’t, in itself, be enough to remedy the situation.

    There is a solution available, but it’s not something that estate agents up and down the country are likely to support because it means more work, working harder for their gains. It’s to do with involving them in negotiating prices at both sides of each property bargain, not just for the vendor.

    More on this is available upon request.

    • robin

      How can you blame the agents though?

      The more they sell a house for the more money they make? Isn’t it their job to make money? And the same goes for bankers. The more the house is ‘worth’, the more the mortgage is for, the more money they make.

      Unless you don’t hold with the idea that everyone’s primary goal in a free market system must be self interest, then you can’t really blame any of them.

  • CityFarmer

    Just to add to the non London vewpoint, incredible as it may seem to the writers at MW, the vast majority of houses are not in London, and around 60m of the UKs populaiton DO NOT LIVE IN LONDON compared to about 8m who do.

  • Dilip

    Definitely in agreement with Rabster, Moneyweek have been harping on about the house price crash since it’s inception, it was right in 2008, but since then the shortage has meant they’ve come roaring back.

  • Marko

    Disagree with Dilip. House boom is nothing to do with shortage and everything to do with easy credit. Why was there suddenly no shortage of housing in 2008? People suddenly didn’t need a roof over their heads? Every young person moved back into the family home?

  • Ellen12

    NATO, and the west, spent thirty years during the cold war defending capitalism and the free market economy against the communist influence only to rig the market sufficiently to ensure the death of capitalism and the free market through the market manipulations of QE, ZIRP and government interventions. The housing market is fully rigged by the government, through their interference with the central bank. But so is every other market out there. Market forces do not decide the direction of prices of anything. George Osborne and Mark Carney do. And despite the huge deflationary pressure the economy is under while these two men insist on their ostrich economics, we will remain log jammed. I think we should just stand back and let the economy run as it wants to run and put a safety net in place for our most vulnerable citizens. But this won’t happen because we do not live in a capitalist country.

  • NeutronWarp9

    Shouldn’t somebody tell ‘our’ Government that London is England’s capital city, and not a country in itself? How much taxpayers’ money does London want? The Millennium Dome, the Olympics, Cross Rail, a proposed new airport, HS2 (which benefits who most I am not sure), Help-To-Buy, etc, etc.
    If a pound spent in London produces more ‘bang for the buck’ than elsewhere as one repulsive individual recently spouted with immense arrogance, why does so much public money need to be spent there as well? There is no compelling reason – only selfish greed.
    Ironically, once there is a bust, what part of the country will be in the biggest need of state aid because of the greatest house price falls? Surprise surprise – London.
    I heard on the BBC news that ‘we’ are all feeling much better off now due to the rise in house prices. Hmm. I hope the various up-coming elections will give our London elite a clear message that the Outlanders are not happy.

    • justsomeone

      without London you can shut down the country… 20%+ of country GDP…

      London is the world’s leading financial centre for international business and commerce and is one of the “command centres” for the global economy.[1][2][3]

      According to Brookings Institution, London has the fifth largest city economy in the world, after Tokyo, New York City, Los Angeles and Seoul with an estimated GVA of £309.3 billion ($546.4 billion) in 2012, and a per capita GVA of £37,232 ($65,768).[4] By way of comparison, London’s economy is roughly the same size as that of Sweden or Iran.[5]

      With an estimated 8,308,369 residents in 2012, London is the most populous region, urban zone and metropolitan area in the United Kingdom.[6] London generates approximately 22 per cent of the UK’s GDP.[4] 841,000 private sector businesses were based in London at the start of 2013, more than in any other region or country in the UK. 18 per cent are in the professional, scientific and technical activities sector while 15 per cent are in the construction sector. Many of these are small and medium sized enterprises.[7]

  • CaptainPeacock

    @Ellen12 WELL Said!

    Desperate dave & his fellow cro*k buddies are running out of time…

    Check this:

    Roll on the elections…

    …AND this is when the blood on the streets of LONDON will start …NAMELY the property CRASH!

    Then you’ll see in the pursuing months programs on BBC TV like panorama interviewing the broke sheeple with negative equity etc., who bought into the lies of help to buy etc., etc., from these lying MUPPET’S in power.


  • Realist

    Have to disagree Ellen, the government do not fully control prices. They can manipulate and stall, but it is simple physics……every action has a reaction and their meddling in one area will effect another. So in the end market forces will prevail, be it in one year or twenty years.

  • Strongbow

    I believe that houses prices are at the mercy of several variables and predicting the future is no easy matter. Apart from having to predict the effects of supply and demand and the availability of easy money, there is the impossible task of predicting what the Bank of England will do with interest rates and what the government will do with incentives and disincentives via taxation or otherwise. We live in a complex world of Government interventionism to grab wealth from the wealth makers and I don’t think any strategy can be set in stone for any length of time.

  • 4caster

    House prices are determined by supply and demand, except that it is supply and demand of loans, aggravated by insufficient housebuilding.
    The supply of loans for house purchase is artificially elevated by schemes such as Help to Buy: also deliberate financial repression through robbing savers of any real return, to provide cheap loans. Simultaneously the supply of new houses is depressed due to rural resistance to urban sprawl, and the reluctance of builders to clear and redevelop brownfield sites in unfashionable run-down parts of towns and cities.
    Sentiment also plays a part, because starter homes are still regarded as the first rung of a housing ladder, rather than an overpriced millstone around the neck of a young borrower, impeding movement of labour and thus social mobility. This is because the correction in house prices that began in 2008 was never allowed to run its course.
    The market is rigged in favour of house-owners: not the mortgage slaves who think they own the houses, but the lenders who hold the deeds.

  • Pinkers Post

    Brilliant analysis. And then there is the media… one of the most hilarious lines I have come across