Are we about to see the perfect housing market correction?
We could soon see an inflation-driven correction in the housing market. That won’t make anyone particularly happy. But it might be the least damaging solution to the house price bubble.
I've recently become a renter again, having been a homeowner for the last ten years or so.
I'd like to pretend that I've stepped off the housing ladder in a deliberate attempt to make a spectacularly ballsy bet on the direction of the UK housing market over the coming months.
The reality is far more prosaic. We had intended to buy, the deal fell through, and so we ended up renting.
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That said, now that I'm getting up close and personal again with the insane dynamics of the British housing market, I'm inclined to pay even more attention to what's going on than I normally do.
And it hasn't escaped my notice that news on the house price front has been rather weak of late.
So have I got lucky? Or am I doomed to fall foul of the oldest mantra in British investment: "You can't go wrong with bricks and mortar"?
Seller numbers are down, as has been the case for over a year now, notes Capital Economics. Over the long run, there are usually more than 60 properties on sale per surveyor. Last month, it was just 43.8. Falling supply is partly down to weak demand no point on selling if no one is buying and the survey confirmed thatbuyer numbers are down too demand has been flat for five months in a row.
With both buyers and sellers going on strike, transactions are falling too an estate agent's worst nightmare, much more irritating than falling prices.
Rics members still reckon on balance that house prices are rising. This may reflect the fact that the survey is less swayed by London than simple house price averages prices in London are weaker than in the rest of the UK right now.
However, both Halifax and Nationwide who provide two of the longest-running data series reckon that UK-wide prices peaked in December 2016.
So is this just a breather (after all, at the start of last year we saw the big rush to beat the second-home stamp-duty surcharge)? Or is the start of something more serious?
I'm not convinced there will be a house-price crash
It's pretty clear that prices in the richest parts of London peaked a while ago and in many cases have since dropped sharply. But a lot of those properties are special circumstances.There's been a whopping great stamp duty increase on the highest-end homes. Conditions for overseas buyers have been made a little less hospitable.
And as my colleague Dominic Frisby highlighted ages ago, there's been a glut of "luxe" developments that have little appeal to anyone other than the emerging-market property investor with money to burn. Not to mention the fact that the high-end London market is the one that had seen prices shoot up most dramatically.So there are some very good and specific reasons for that market to struggle.
As forthe rest of the country well, it's less clear. There are still plenty of parts of Britain where prices have only just regained their previous financial crisis-era peaks (and we're not even talking "real" after inflation terms there).
And the biggest threat to house prices in the UK a rise in interest rates, and thus mortgage rates seems distant for now. Yesterday,the Bank of England issued its latest inflation report, alongside minutes from its latest meeting, and it doesn't seem to be in any mood to raise rates certainly not this side of an election.
The Bank always likes to fudge things so that it doesn't get too predictable (predictability is the enemy of central bankers you have to be able to bluff convincingly if you really want to make the market do what you want it to).So it did warn that there might be call for a rate rise in the second half of the year, and that it wouldn't tolerate inflation going too far above target.
But no one had joined Kristin Forbes in voting for a rate rise. The Bank was also downbeat on household consumption prospects, even although it reckons that first quarter GDP growth will end up being revised higher. The warnings about inflation also ring a little hollow given that it's been above target for the past three months already, and the Bank expects it to hit 2.7% by June.
So a rate-induced slide in house prices seems unlikely.However, at the same time, the fact remains that prices arejust too high, even with mortgage rates where they are today.High prices, low affordability but no obvious trigger to force prices lower. What's the answer?
The obvious solution and perhaps the one we'll get is for prices to fall in "real" (after-inflation) terms, rather than nominal terms. So prices will fall relative to wages. Overall, the market stagnates, until wage inflation has allowed the price/income ratio to fall to something approaching a more reasonable level.
Meanwhile, "stranded" renters should benefit from last year's rush to beat the stamp duty rise on second properties. Rents in many parts of the country London particularly have dipped amid a big influx of new rentals hitting the market.
An inflation-driven correction in the housing market would avoid all the problems you'd get with banks' balance sheets if prices were to fall in nominal terms. It also solves the problem of reluctant sellers clogging up the market. People think in nominal terms, so they don't care if the big round figure that they believe their house "should" be worth is actually worth 10% less in real terms than it was a year ago as long as they get the figure they've "anchored" to on paper, they'll be happy to sell.
It's not a solution that will make anyone particularly happy buyers don't get bargains and sellers don't get life-changing sums for sitting on a pile of bricks. But it might be the least damaging one.
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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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