House prices: the biggest bubble since the last one

For sale signs are popping up all over the place

It’s spring in Britain! As I take my morning stroll, it’s beautiful to see the trees in blossom, the crocuses and bluebells in full flower and the blooming of ‘for sale’ signs on the nation’s front drives.

Meanwhile, whichever way I turn, there’s one survey or another telling me that house prices are going through the roof – and it only takes a look at the various house price indices to confirm it.

A poll last week showed that up to a quarter of homeowners are checking the value of their house on valuation websites every week! Now, if that doesn’t seem bubbly, then I don’t know what does.

House prices are always such a great topic for debate, let’s have a look at the latest news and try to figure out what’s really causing the current acceleration in house price growth.

This market shows no signs of cooling off

According to a survey reported recently by property website Zoopla, homeowners expect property prices to rise by 8.8% over the next six months. That’s double the rate of growth predicted by the same survey last year.

A full 95% of respondents expect prices to rise over the next six months, up from 74% last year.

As a result, some 42% of homeowners are looking to augment their bounty by adding home improvements.

And on top of that, you can factor in a significant increase in the number of homes that the ‘already owner occupiers’ plan to buy. 31% are planning to buy a property in the next 12 months, up from 22% in January.

Wow… what busy bees we all are! And so predictable. After all, the government has been hell-bent on pushing the housing market, for two simple reasons. First off, it generates a fantastic amount of tax by way of stamp duty. Second, all the economic activity in the construction and renovation sector adds more to the tax take as money flows through the system.

It’s a virtuous cycle, right?

Great expectations

I put it to you that expectations of rising prices creates its own weird reality.

All these surveys and indicators and headlines (and maybe Right Side articles) create a sort of positive feedback loop, where people buy because they see rising prices all around them. And Mark Carney is only too happy to help. He’s promising to keep interest rates low, even as the economy grows and house prices boom.

And as if all of these expectations weren’t enough, you can add in the fundamentals of supply and demand. Supply is constrained. And immigration, and a larger number of smaller family units, will continue to drive demand through the roof.

All of these expectations pull forward demand. It’s a race to ‘get in’ before prices get ahead of you. This is typical of investment markets. The price of a stock isn’t just calculated by fundamentals today (say historic price/earnings (p/e) ratios), the market looks at expectations of future profits too.

Homeowners might not realise that they’re valuing a house in that way, too. But it’s nonetheless what they’re up to. And this is exactly the mechanism by which investment bubbles are created. Punters expect that prices will go up and stay up. So they want to get in now, before they do!

…but it’s not going to last

And that’s exactly where the theory falls flat on its face.

It’s true that the undoing of some of the factors currently pushing up expectations (the government schemes, banks’ willingness to lend and perhaps the supply curve) will stymie future prices, but I suspect that there is one thing, and one thing only, that will really pull the rug out from under these expectations: interest rates.

The real power to drive the market lies with the central banks. And right now, the central bank seems to be colluding with government to drive expectations. I know that they don’t come out and say so. But as ever, when it comes to central banks, judge them by what they do. Not what they say!

When Mark Carney is forced to raise rates – perhaps at the moment that inflation makes its long-awaited return – expect all hell to break loose in the property market. Because higher interest rates will change all those optimistic ‘expectations’ in short order.

Anyway, spring is here and it’s my favourite part of the year. But the seasons change. It’s going to be one hell of a summer for the housing market, but watch out when winter arrives.

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  • Wotan

    Anybody, who thinks that rising house prices are indicative of economic health is an imbecile. And house owners, who feel that they become wealthier as the prices of their houses go up are deluding themselves, they will never benefit from the high value of their houses, but their heirs will!

    The construction industry should not be seen as an “economic engine”. Funds that go into property immediately become economically inactive – they represent “dead money”. A housing boom is invariably debt-fueled and only benefits the usual parasites that feed off the economy; its economic effects are all negative, as funds that should be available for productive investment are tied up in completely unproductive objects. What is happening now could and should have been avoided by raising interest rates some time ago. Such a move would have had a twofold effect: it would have strengthened Sterling and thereby stabilised and raised disposable household income and it would have normalised the housing market. It also would have increased investment income.

    Instead, Sterling went up owing to the weakness of the Euro and the Dollar, which created the current “recovery”. Unfortunately, the intellectual pygmies in charge are not even aware of the fact that this is the true reason for the economic improvement that has been registered. And, equally, they will be lost for words when the recovery evaporates should Sterling begin to weaken again.

  • DrD

    ‘lost for words’ Wotan? Not likely. Words are what they’re good at!

  • robin

    Yes but with national debt over 1.2 trillion, how can the government ever raise interest rates and still maintain a budget?

    They may be forced to as interest rates around the world start rising. The question then becomes when will those interest rates rise? And when they do, what happens if we are unable to raise interest rates here?

    As to the first point: when will they raise rates? I don’t think we can know, but we do know that America suffered a proper property crash. And with shale gas etc and economies of scale, I believe they are in better shape than we are. So they will raise rates before we do.

    Will we raise rates? Not at first I think. And then the pound will devalue quickly. Inflation will pick up directly after that. We will inflate our way out of this. Its our only option. And rates will go up a bit as well. So it will be both. Maybe the thing to do is get your money out of the UK.

  • Alec

    The Bank of England and the poodle Carney will do as they are told by Cameron and Osborne. Didn’t you know there is a general election in 11 months. The so-called recovery is all smoke and mirrors and the debt continues to clime just like the property bubble.

    • Don’t panic

      Highest employment on record just isn’t smoke and mirrors Alec.
      While we look at Gordons enormous debt mountain we have to be thankful that we now have a team who have the vision to get us on back on the right track. As for the housing market I think robin above sums the situation up very well.

      • Carrick

        Highest employment on record is smoke and mirrors. 0 hour contracts and pushing anyone unwilling to comply off the unemployment lists.

  • Andy

    Sterling up nearly 15% against the dollar, and 6-7% against the Euro in the last year, that is quite a significant weight pinning inflation down. Threadneedle Street can of course keep rates pinned to the floor by buying up more of our debt, but as everyone else has pointed out that won’t help the currency if rates are rising elsewhere in other currencies. Bye bye recovery, and hello recession.

  • AlastairM

    The tide can go out a very long way before the tsunami finally rolls in.

  • Greg

    What they should be doing is to scrap BTL mortgages and provide more security of tenure for tenants – this would help to deflate the house price bubble without needing to increase interest rates. A Land Value Tax to replace current property taxation and inheritance tax (pensioners would pay LVT from their estate upon death) would encourage greater supply of homes and could be used as a tool to manage house price inflation instead of interest rates.

    • Greg

      …the LVT would provide regular income for the Treasury to pay off National Debt (not dependant on property transactions unlike Stamp Duty).

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