The housing market is heading for a fall
The latest news on house prices made for ugly reading, says Bengt Saelensminde. Everything points to one thing: the UK housing market is heading for a big fall.
On Monday, Rightmove delivered news of its latest health check on the UK housing market. And boy was it ugly.
Rightmove spelled out the news in three grim statistics:
1.3m properties were put on market last year 884,000 properties were sold (HMRC data) 530,000 mortgages were granted
Those three facts all point to one thing: the UK housing market could soon be falling in a big way.
Let's break that down to see why.
The half a million property overhang
Rightmove represents 90% of the housing market in the UK. So its statistics are meaningful and shouldn't be ignored.
The story this time is a very worrying one for homeowners.
If 1.3m homes came to the market and 884,000 sold, that left a new overhang of just under half a million properties. But had it not been for rich cash-buyers, ferreting away investment property (no mortgage), this would have been much worse.
The other issue is credit. If buyers can't get mortgages, then there is very little chance that that massive overhang of property is going to get cleared anytime soon.
Mortgages granted to homebuyers were a paltry 530k and most of those were to equity-rich buyers. The banks have already indicated that they aren't going to be increasing lending this year. In fact lending could even go down from here. As John Stepek points out (see: Borrowing costs will go up even if the Bank keeps rates at 0.5%)the banks will have a hell of a lot of debt to pay back to the Bank of England and Treasury by the time this year is out.
Where does all of this leave the average housebuyer? It leaves him locked out of a market in deep paralysis, according to Rightmove's Miles Shipside. Demand for housing is down. And what about supply?
Well we know that there was an almighty overhang left over from last year. And we know that property coming onto the market in January was up around 35% on last year. And according to Rightmove, that's only going to get worse as forced sellers' start to appear. Many people just won't be able to afford to keep up mortgage repayments as stagflation bites.
- Discover how to profit from oil without ever owning a single barrel
- Why NOW is the best time to put a few carefully selected oil investments into your portfolio
The housing snarl up
Rightmove rightly identifies the second half of this year as the time when the chickens come home to roost.
Interest rates are set to go up - and that's even if the bank rate doesn't move. We're already seeing evidence of rising market interest rates (where the mortgage lenders borrow the cash) and it's pushing up mortgage rates.
With the overhang of property from last year still on agents' books, and coupled with an increased supply this year, a very unhealthy dynamic is emerging.
Ultimately, the underlying imbalance in demand and supply of houses has been repressed by low rates. Existing homeowners have hung on in there and cash rich buyers have chased any old yield - together, they've kept the market in check.
As the imbalance continues to grow and rates start to let rip, things are about to change.
Anyone thinking that this year's trough is going to provide a nice little springboard for a bounce should look to the vital statistics. Have a look at MoneyWeek's vital economic indictors to keep track of this story.We've been tracking several indicators that we reckon are the best early warning signs for the house markets - including mortgage approvals, consumer confidence and the share price of Carpetright, Europe's leading floor covering retailer.
They reckon that each measure points to at least an extra 5% price fall from here. And that could be just the start. You can see all these charts - and find out what they mean - here.
I will also keep you up to date on this story as it progresses - with housing set to fall by the end of the year, it may even be worth shorting the housing market. I'll explain how in a forthcoming issue.
This article was first published in the free investment email The Right side. Sign up to TheRightSide here.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do