Merryn's Blog

Why house prices aren't finished falling yet

The UK isn't like Japan, argue some pundits, because we haven't seen the same scale of collapse in house and stock prices that Japan did. But all that proves is that UK asset prices could have a lot further to fall.

Bronwen Maddox added to the spat of recent articles in the press about Japanisation/Japonification in the Times this week. She made several good points about why we are not going down quite the same path as the Japanese (I sort of agree I'll come back to this another day). But one of her reasons didn't quite stack up.

We are not the same as Japan, she said, because the asset price rise and fall in the UK "did not come close to that of Japan's property and stock markets 20 years ago." The danger here is in the use of the past tense. I would have phrased the sentence differently: "asset price falls in the UK have not come close to that of Japan's property and stock markets 20 years ago, yet."

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Japanese prices didn't fall all at once. It was a long horrible drawn out process. Sure residential land prices ended up down, going on 70%. But they didn't reach that point until 2005, over 20 years after I took my first job in Japan under the sadly mistaken impression that the crisis was all but over. So if it took that long in Japan for the bubble to be utterly purged, why might you think that asset price falls are over here? You can argue that parts of the stock market are cheap, and you can of course argue that, in the UK, the market as defined by the FTSE 100 at least is in no way representative of the UK economy. But we tried that in Japan for years too (its big exporters were always said to move independently of whatever was going on in Japan despite the fact that all that mattered to them was the price of a yen) and it made no difference whatsoever.

And what happens if we get a real deflationary scare in the UK? What if the stock market suddenly accepts that the bond market is right with its seemingly shocking low yields and there is in fact a decade plus of very low or no growth ahead of us? That will hurt. Then what of house prices here? Is it really reasonable to think the falls there are over? Surely not.

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Depending on which indices you look at, house prices after an adjustment for inflation (one the Japanese didn't have to make very often) are down in the region of 25-30%. That's a lot. But it still isn't enough. On numbers from Capital Economics, prices still need to fall by another 20% or so to "restore the historical link between prices and average earnings." When will this next lurch down come? It has been a slowish business so far. Thanks to very low interest rates, a reasonably stable employment market and the consequent dearth of desperate sellers volumes have been very low and the market hasn't really cleared. It is possible that this is exactly how things will stay as inflation does the job of bringing real prices down.

But with household income unpleasantly squeezed by high inflation and very low wage rises (combined to create a fall in real wages) and as unemployment edges up, I wouldn't bet on it. That's particularly given the case now that there are hints that borrowers won't be living with ultra low mortgage rates forever regardless of what happens to the base rate.

Lloyds, the largest mortgage lender in the UK, has just raised its standard variable rates (SVR) the rate to which borrowers coming to the end of a deal move on to from 4.84% to 4.95% for borrowers with The Mortgage Business and the Bank of Scotland (both part of the group). At the same time, some banks have begun to raise SVRs and tracker rates for new customers; something that appears to have taken many by surprise.

One couple quoted in the Telegraph declared themselves "dumbfounded" by the rise. They are in the process of selling their house. I wonder if the higher payments will make them feel like cutting the price to get it away a little faster? Given that transaction volumes are under half their peak levels and that the average house is now selling for around 10% under the asking price, it might not be a bad idea. More on all this in last week's magazine cover story: How much further will house prices fall?


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