Housing Coup de grace that could lead to 80s rerun
Experts agree the only question is how fast housing collapse will be
Ashley Seager
Saturday November 6, 2004
The Guardian
Barely a day goes by, it seems, without another statistic or piece of analysis about the state of Britain's housing market.
Often these indicators have been inconclusive or, worse, contradictory. Homeowners - and those trying to get on to the property ladder - could be forgiven for being confused. Can they expect a market crash as the bubble finally bursts after five years in which prices have doubled, or is a manageable slowdown in prospect?
The most recent reports all agree on one thing - prices are falling in the wake of the Bank of England's five interest rate increases since last November. The rate rises - to their present level of 4.75% - were in part designed to cool what the Bank saw as runaway house prices.
One of the most closely watched indicators, from the Royal Institution of Chartered Surveyors, showed that the percentage of surveyors reporting price falls was the highest for nine years.
The National Association of Estate Agents reported the fourth monthly price fall in a row last month and warned that buyers were pulling out of a falling market.
These figures were echoed by a survey from property website Hometrack.
Then came mortgage approvals figures from the British Bankers' Association and the Bank of England. Approvals are a significant indicator of where house prices are heading and both sets of data showed a hefty, 30% fall in September from a year earlier
The two big price indicators, from the Nationwide and Halifax, showed falls of 0.4% and 1.1% in October respectively. The Halifax tends to be more volatile from month to month than the Nationwide, but the average of the two, a fall of 0.7%, is the weakest in almost a decade.
Martin Ellis, the Halifax's chief economist, said: "Recent price movements confirm that the Bank of England's rate hikes have taken impetus away from housing demand while first-time buyers continue to be held back by affordability."
In fact first-time buyers, the traditional prop of the housing market, faded away more than a year ago as property prices simply moved out of reach, meaning it was only a matter of time before the market slowed, irrespective of the Bank's action on interest rates.
But there is little doubt it was the Bank which delivered the coup de grace to the long-running boom. Indeed, many estate agents say that governor Mervyn King's warning in June that house prices could fall dealt the market a body blow from which it has not recovered. Also, buy-to-let lending, a significant driver of the market in recent years, has slowed as rental yields - the rent divided into the purchase price - have fallen below interest rates, meaning rents will no longer cover mortgages.
The question is, of course, what happens now? Will prices stagnate and move sideways for a few years, as the optimists think, or will they fall sharply, as they have done after every previous housing boom? It is true that the path of house prices in recent months does show remarkable similarity to that at the top of the last housing boom in the late 1980s but that may be no more than coincidence.
The proponents of a so-called "soft landing" for the market, such as Mr Ellis and Alex Bannister, chief economist at the Nationwide, argue that things are different this time because we are not entering a big recession as in the early 1990s. Back then, they argue, house prices slumped because of a big rise in unemployment and a sharp increase in interest rates.
[ah yes, the famous, It's different this time argument. I hope to see more of those. Mish]
This time, they say, the economic fundamentals remain strong. The economy is still growing and unemployment is very low so there is no obvious trigger to cause a crash.
"House prices are more likely to grow at a subdued rate rather than fall sharply," says Mr Bannister. "Our view is that the current moderation in price growth expectations will not translate into widespread panic."
He also thinks that interest rates may well be close to their peak and that should reduce the danger of sharp falls in house prices.
There is an opposite view. The property market is in the middle of a bubble, as the stock market was in the late 1990s dotcom boom, and the bubble will burst without the need for a real trigger, as the dotcom bubble did.
The proponents of this argument point to the misalignment between average earnings and house prices. The ratio, which historically averages 3.5, is now up at nearly 6, well above the level in the last boom. This will have to correct itself, they argue, and through a fall in house prices rather than growth in earnings.
John Calverley, chief economist at American Express Bank, says house prices would have to stay still for about eight years to allow earnings to catch up, a scenario he thinks highly unlikely. He thinks the housing market is in the "mother of all bubbles" and will probably drop by 30% in the next couple of years.
Another bear, Ed Stansfield of consultancy capital economics, says than in previous busts, house prices have begun to fall before the economy slowed sharply, meaning that house prices do not need an economic slump to slow.
An increasing number of anlaysts are moving into the bear camp as the evidence mounts that prices are beginning to fall, remembering that markets are driven by fear and greed. Greed ruled in recent years as prices rose. Now fear is taking over as prices begin to fall.
This is important because the optimists argue that house prices are high at least in part because there are not enough properties available and house building is at the lowest for decades. Thus, if prices dip a bit, many first-time buyers will jump into the market.
But any study of market psychology shows that buyers traditionally shun a falling market until they are sure that prices are no longer falling.
Mr Stansfield believes the current boom is turning to bust as the late 1980s boom did. "We remain comfortable with our prediction of a 20% peak to trough fall in house prices over the next two to three years."
money.guardian.co.uk
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I really do not want consensus on this.
That said, I am fairly sure we do not have it.
I think we primarily have seen calls for "leveleing off" of house prices same as the US. More denials of bubbles than bubble calls.
Can someone in the UK confirm this.
Is there rampant belief in a housing bubble now or mainly denial?
Mish |
