Is the jump in house prices just a Brexit bounce, or is it more durable?

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UK house prices are clearly benefiting from a relief rally. The latest data suggests that prices rose solidly in January. This isn’t what we’d hoped for. We’d hoped that prices would flatten and lag behind wage growth. So is this just a temporary rebound? Or are we warming up for another boom?

Is this just a Brexit bounce?

According to the latest data on house prices from Halifax, house prices in the UK are now rising at an annual rate of 4.1%. That compares to a 4% rise in December. The Halifax figures have tended to be at the high end of the various house price indices in recent months. They also tend to be a bit more volatile than the Nationwide figures (which are collated in a similar manner). But, whether you like it or not (and I can’t say I’m overjoyed about it), it’s hard to deny that the housing market looks as though it’s perking up.

Indeed, as Hansen Lu of Capital Economics (which, as a group, tends to be on the bearish side when it comes to house prices) points out, when you take all the most recent data on prices, “the evidence that house price growth picked up around the general election is clear.”

The precise extent of the pick-up is hard to gauge – prices rose by 1.9% according to Nationwide, while asking prices rose by 2.7% according to Rightmove. And it’s worth noting that while the 4.1% rise sounds strong, the rate of increase appears to have slowed (prices rose by 0.4% month on month in January, versus 1.8% in December).

However, one of the positives about the last few years is that wage growth was starting to outstrip house price growth on a regular basis. That was good news because it meant that affordability had room to improve without the need for a destabilising all-out house price crash.

Irritatingly, it looks as though that might not continue for much longer. Because underlying activity in the housing market is clearly picking up too. In December, government data shows that property transactions came in at 104,670. That was the highest level seen since March 2016. And year on year, it was up by nearly 7%.

Mortgage approvals are perking up too. And estate agents and surveyors are growing more optimistic, presumably in response to seeing more clients coming through the door. So is this likely to continue? Or is it some sort of “Brexit bounce”?

The risk is that house prices keep rising

I’d imagine that there’s an element of Brexit exhaustion involved in the bounce in the housing market. I think there are two factors. Even before the general election it became clear that any real threat of an immediate “no deal” was off the table. Boris Johnson had agreed a deal with the EU, and if Jeremy Corbyn had won, there probably wouldn’t have been any Brexit at all. So some of that uncertainty was already gone.

Also, there were probably some overseas buyers who were keen to get back into the market in case they missed the chance to buy with a sterling discount. They might have been overly hasty on that front, given the pound’s relatively slow drift higher, but you’d expect that to have driven some of the pick up.

So you can see that a combination of post-election relief and a sense that it’s time to give up on delaying big decisions just because of Brexit, might put some vigour back into the housing market. But sentiment only takes you so far. It’s a mistake to put too much stock in the power of sentiment, or animal spirits, or confidence. There’s always an underlying factor behind this stuff. It doesn’t spring out of thin air. It’s not a product of our collective humours taking a turn for the worse or the better.

And in this case, the underlying factor has been that borrowing has grown cheaper over the last year or so. Not by a massive amount. But by enough. Any time you loosen credit conditions, making it cheaper and easier to borrow money, you end up pushing up the price of the one thing that almost everyone needs to take out a huge loan to buy – houses.

The Bank of England itself admitted as much late last year in a report on its Bank Underground blog (which is a great resource – I would recommend you take a look at it). The researchers took a look at what drives house prices. Most people argue that it’s about the supply and demand for physical homes. When asked why prices are unaffordable, the argument is always “because we don’t build enough”.

I’ve never thought this was the case – many countries have suffered at least one house price boom and bust in the last two decades, and several of them had clearly oversupplied markets (Ireland and Spain being the two that immediately spring to mind). Yet prices still went up.

And that’s what the Bank analysts, John Lewis and Fergus Cumming, found. “The rise in real [after-inflation] house prices since 2000 can be explained almost entirely by lower interest rates. Increasing scarcity of housing… has played a negligible role at national level.” In other words, supply does matter. But it’s the supply of credit, not physical property, that influences prices.

The question then becomes: so what happens to interest rates? And for now, the clear answer is that they aren’t going anywhere – up or down. But if the economy continues to do reasonably well, I suspect that banks will grow even more competitive in terms of mortgage lending, and pressure will be on mortgage terms to grow even easier.

So much as I hate to say it, I think the risk is that prices keep rising this year. And I think the hope now has to be that wage growth starts to accelerate to keep up. That might be wishful thinking, but let’s keep an eye on it.