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?
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd.
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.
Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do[xyz_lbx_custom_shortcode id=10]