The housing market starts to sputter
Soaring house prices can't keep rocketing forever, says John Stepek. It could soon be time to take cover.
This week we return to one of our readers' favourite topics UK house prices. Regular contributor Jonathan Compton looks at the state of the British residential property market and concludes that we're heading for trouble.
There's a reason why house prices are such a perennial topic of conversation in Britain and a regular fixture on these pages it's because the market seems to be in a near-permanent state of overexcitement. Prices corrected drastically after the 2008 financial crisis, but in most parts of the country they have returned to pre-crash levels, and in London and the southeast they have long since surpassed them. House-price-to-average-income ratios across the UK are again at or near record levels, while the plight of first-time buyers is noted by every politician with a policy to sell.
It's true that price growth has slowed somewhat this year. Figures from Nationwide and Halifax show house prices flatlining over the past couple of months, with annualised growth slipping to around 4% not much higher than inflation, particularly if you use the old retail prices index measure of 3.1%. However, with wage increases still lagging behind at 2.3% annual growth, it's going to take a long time to inflate ourselves back to affordability at current rates.
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Why do we keep finding ourselves in this situation? Debates have been raging about the causes of Britain's housing problem and the potential solutions for many years. Some say that it's about physical supply and demand Britain just needs to build a lot more houses. Others (us included) argue that the real problem is the supply of credit.
The quantity of houses doesn't matter as long as buyers can borrow increasingly vast amounts of money to buy them, then they will just continue to chase prices higher.Geoffrey Meen, Alexander Mihailov and Yehui Wang, economists at the University of Reading, agree that simply building more houses can't fix things.
In a recent paper, they conclude that there is no feasible rate of physical construction that would "stabilise the price-to-income ratio". The real problem, in effect, is risk appetite. As long as buyers reckon that property represents a good bet compared to other assets (which an environment of low interest rates encourages), they'll keep on buying.
The good news for those waiting to get on the property ladder, say the Reading team, is that even without added supply, price-to-income ratios can't keep rising forever, and so are likely to stabilise.The bad news for everyone else is that this could well "take the form of an undesirable market collapse". No wonder Jonathan is desperate to find a way to "short" UK house prices.
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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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