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Last year was a good one for anyone who’d like to see some sanity injected into the UK’s housing market.
By the end of the year, house prices had risen by about 2.8% if you go by the Office for National Statistics data to November. Or 1.3% if you use the Halifax price index for the year. Or just 0.5% if you use Nationwide.
With inflation (as measured by the Retail Price Index) at 2.7%, and more importantly, wages at above 3%, this means that house prices are flat or falling in “real” terms – ie, after inflation.
That’s good news. But will it continue?
Why gently falling house prices are a good thing
British property owners have enjoyed a couple of decades of boom time. Using borrowed money to buy a property in Britain – ideally London – in the mid-to-late 1990s was a life-transforming financial decision for many people.
Every year, your house made much more money than you did. And if you were reasonably careful, that gain was tax-free, unlike your pay packet.
So some people will question why it’s good news that prices are now flat or falling. I’ll explain quickly.
A house is not an especially productive asset. If we all spend our time fretting about how on earth we’ll ever be able to afford to live in a moderately acceptable dwelling place at a humanly bearable distance from our place of work, then that’s a terrible waste of energy.
It’s also become a big political issue. Young-ish people are fed up with being unable to afford to buy a place of their own, or having to live in fear of the whopping amounts of debt they need to take on to do so. Therefore, there’s a lot of anger, and a lot of desire for the government to “do something”.
As a result, we’re in danger of misallocating a lot of resources badly to sort out a problem that has ultimately been caused by overly loose monetary policy interacting with pro-housebuilder government intervention, bad incentives for banks (it makes more sense for them to give you a loan to buy a house than to start a business, for example), and a government dependent on the tax take from the housing market.
The solution here is for house prices to come down. The problem is that house prices have a big impact on lots of things that go well beyond the property market.
A slide in house prices will hit the tax take. It will hit banks’ balance sheets. It will make people who own houses feel poorer and spend less. It will decrease labour mobility even further because people can’t move when they are in negative equity (ie, they owe more than their house is worth).
What’s the painless way to boost affordability and defuse the justified anger? It’s for wages to go up while house prices stay static. That way, balance sheets don’t get slaughtered, but the problem gradually goes away.
That’s why it’s good news that house prices are finally lagging wages. The question is: will it continue?
Estate agents are feeling very gloomy
Estate agents and surveyors questioned by the Royal Institute of Chartered Surveyors (RICS) certainly think so, at least for now. Their expectations for house sales over the next three months are the worst they’ve ever been since the RICS survey began in 1998.
Bear in mind that this includes the 2008 financial crisis period. That’s quite a striking statistic. Is Brexit really as grim a prospect as the banks shutting down? Obviously not.
However, you can see why the existence of the 29 March deadline might well have encouraged a lot of people to delay (although I strongly suspect that it’s going to be moved further out).
Just like stock pickers, potential homebuyers all want to time the market. They are now aware that prices are falling or growth slowing. No one wants to buy before they’ve hit the bottom. So holding to see what happens with Brexit is likely to appeal to more people this close to the deadline than it might have a year ago.
Thing is, this will either leave pent-up demand for later in the year, or the deadline will get pushed back and people will just have to make decisions. So while I can agree that Brexit might be having an effect just now, it’s more about timing than fundamentals.
So what can we expect this year? Really, I think it’s more of the same. The crackdown on landlords is not ending any time soon, and I think that’s one of the key drivers of the shift in the market. Essentially, a big chunk of demand has been knocked out of the market which should make life that bit easier for standard residential buyers.
And with borrowing costs unlikely to fall any further, it’s hard to see where the impetus for prices to rise could come from. Equally, without a surge in borrowing costs or a nasty, job-shredding recession (which I suspect is still a bit away), then there won’t be a spike in forced sales. So that indicates that price falls will be gentle.
Odd as it might seem, the biggest risk to the housing market this year could be that Brexit goes well. In this context, “going well” probably merely means reaching a deal of any kind that puts us on a clear, moderately predictable road to an outcome. At this point, I think the more objective observers (international investors) would just like to know what’s going to happen.
On the one hand, you would see an improvement in risk appetite; no doubt about it. If you have foreign investors who have been contemplating exploiting the weak pound to buy, then they would have to move fast. So you might get a rally there.
On the other hand, it would make life a bit harder for the Bank of England. Interest rates are still extraordinarily low. If the Brexit uncertainty lifts, interest rates might have to head at least a bit higher from here. I wouldn’t expect anything drastic (rising sterling would keep a lid on inflation for a bit). But it certainly wouldn’t make mortgages cheaper.
Overall, maintaining our current course – with house prices flat or gently falling, while employment remains strong and wages rise – is still the least painful way to get a correction in the property market. And looking at the variables, it still seems to me to be the path of least resistance.
Let’s hope it continues.