Sorry - the house price crash isn't over yet .
Telegraph -- Edmund Conway Economics -- August 10th, 2009 -- blogs.telegraph.co.uk
The housing market crash is over; prices have fallen as much as they are going to; sit back, strap up and prepare for the recovery. That, at least, is the impression we’ve been left with after a number of institutions effectively declared that the slump is at an end. Last week the Royal Institution of Chartered Surveyors binned its forecast for a 15pc fall in house prices this year and replaced it with the prediction that home values could actually rise. This morning, the Centre for Economics and Business Research said we could expect a (small) rise in house prices between next quarter and the end of 2009.
So is the house price crash really over? I’m afraid not - at least not as far as I’m concerned. This is not to say there won’t be plenty of rises as well as falls over the next few years. As this chart from Nick Parsons of National Australia Bank shows, in reality, house price crashes aren’t all about consistently falling prices; during the early 1990s, prices rose quite sharply in some months, but over a three year period they tended to fall that little bit more than they rose.
Halifax monthly house price changes during the latter years of the last slump
The housing market is not like the equity market. Whereas share prices tend to fall sharply earlier than most other asset prices and then recover rather quicker, property behaves more sluggishly, usually dropping gradually and spending a long time at the bottom before slowly gathering pace some time later. A property crash usually lasts five years or so. The reason is that house prices are particularly sensitive to increases in unemployment. When people lose their jobs they sometimes have to move house or, if the worst comes to the worst, have their homes repossessed. It is almost unheard of for the property market to bounce back when unemployment is still rising at a fair whip.
Moreover, the rises in the average house price at the moment masks a key fact, which is that the actual turnover of housing is still close to a record low. Some people may be willing to pay a little more, but this represents only a tiny fraction of the market; few people are putting their homes up for sale; few are really looking to move (in this regard it is worth drawing a parallel with the stock market: yes, it has risen sharply in the past few months, but this has been on extremely low volumes).
Housing transactions - according to the Land Registry
There is no doubt a certain amount of extra impetus has been delivered by the Bank of England’s decision to slash interest rates all the way to 0.5pc. Notwithstanding the extra premium banks are charging customers for mortgage borrowing, loans are still priced very reasonably at the moment. For those who have enough of a deposit, it is a pretty cheap time to borrow. But who are those people flush with cash at the moment? Well that brings us onto the key issue here. There is one sector of the housing market which is starting to boom, and which could continue booming for at least a year: the high-end side of the London and South East market dominated by bankers.
As you will no doubt be aware, bonuses are back, and this is already being reflected in the house price figures. According to the Land Registry, London saw by far the biggest price jump in June, rising by 2pc. Prices in almost any area north of the Watford gap are still falling. When the banks actually start paying the bonuses at the end of the year, this London/South East mini-boom will heat up even more.
But this boom feels very much like a last hurrah. My hunch is that although many bankers think it really is back to the races (in terms of their remuneration) I suspect otherwise (as you may have told from some of my columns). So after this round of bonuses the extra impetus from the City property buyers could dissipate. Moreover, there are still some fears that we could succumb to another round of financial crisis in the next year or so, something which could do for London prices.
And this small pocket of activity cannot dispel the simple fact that house prices are unlikely to be fair value at the moment. They simply have not come down enough. Moreover, the amount of debt the average mortgage payer is in for has not diminished. Many homeowners have survived the first couple of years of the crisis because the Bank reduced interest rates so much. But they will suffer gradually as the Bank starts to lift rates. According to Fathom Consulting, this confluence of potential foreclosures and defaults could be a major issue for the UK economy next year. Others suspect that this means we could see the rise in the numbers of “zombie” households - those who are crippled as the cost of their debt rises, but not in so much trauma that they actually lose their homes.
House prices are currently about 25pc lower than at their peak. There could still be some way to fall, but it seems unlikely that we would endure a further 25pc fall. But to dismiss the prospect of further drops in values is extremely short-sighted. We are still very much in the danger zone. Yes, policies such as Quantitative Easing could well store up inflationary pressures for the coming years, but I am sceptical as to whether the risk of a Japan-style debt deflation trap has really been averted yet. If not, there is every prospect that house prices could literally go nowhere, or south, for a decade or so. It’s not a palatable thought, I know, but to assume that risk has gone would be extremely foolhardy.
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