By Michael Baxter 2 Feb 2010 [0 Comments | 420 views]
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Predictions that house prices are set to rise are like buses. You can hang around for ages waiting for a hint of optimism, and then, all of sudden, there is a traffic jam of buses carrying bullish forecasts.
Look a little deeper, however, and the buses appear different. Yes, passengers on one of them are clearly on a one way ticket to the land of boom, and maybe fairies. Another busload was perhaps a victim of the media with press headlines non-reflective of substance.
Meanwhile, some other buses have appeared, this time there’s two of them, but they are on a course for somewhere far worse, the land of house price crashes.
CEBR predicts boom
In the world of bullish forecasts on house prices, the Centre of Economics and Business Research (CEBR) stands at the top. There is this view, held by some, that since house prices relative earnings are still way above the historical average they are due a fall. CEBR puts a red cross though these comments, saying ‘wrong’. It is an advocate of affordability, arguing it is the cost of mortgages that counts, and that in any case low supply means future rises are inevitable.
Earlier this year it predicted that by the end of 2012 average house prices would be 12 per cent up on current values. See House prices: the prediction for 2010
Now, a new report from CEBR, has predicted a 20 per cent jump in prices by the end of 2013. You don’t need to look far for the reasons, low interest rates, low supply and the surprising resilience of the labour market.
Media says Nationwide predicts boom
The Nationwide it would appear also belongs to this group of bulls. Take this headline from the Mail: “House prices could rise by 10% a year: Mortgage lender predicts biggest increase since 2007”. Or there is this one from the Mirror: “Experts forecasting end of the housing market’s mini-boom are wrong again.”
The two headlines, and by the way there are many of more of this ilk, were drawing attention to story that the Nationwide has said house prices only need to avoid falling next month for us to see a 10 per cent plus annual rise in average prices.
And yet what is a little odd, is that if you read the Nationwide report you get a far more circumspect prediction. The building society’s chief economist Martin Gahbauer celebrated the fact that unemployment hadn’t fallen to the extent that many feared, but said ” These improvements in the headline jobless figures, however, hide some of the other adjustments that have been taking place in the labour market, most notably with regard to average pay. Over the course of 2009, UK average earnings growth has fallen to the lowest levels on record, as many employers have opted to spread their cost reduction measures over a wider segment of the workforce by freezing or reducing pay.”
He added “With pay inflation near zero or even negative, every additional increase in house prices worsens housing affordability, particularly since interest rates are very unlikely to fall any further. All else being equal, this limits the upside potential for the current recovery in house prices. On the other hand, pay restraint has allowed more people to stay in work and continue to service their mortgages at the current low rates of interest. As a result, relatively few households have been under financial pressure to sell their homes into what remains a relatively weak demand environment.”
And for his conclusion said: “With negative real earnings growth, the future path of interest rates becomes even more critical for the housing market, particularly with a growing proportion of the mortgage stock now on variable rate deals (chart 2). The consensus view is that interest rates will remain unchanged until the final quarter of 2010 and possibly longer, as spare capacity created by the recession bears down on inflation over time. The inflation trends in 2009, however, are starting to call into question the validity of this view. Inflation has consistently…..”
Bank of England data raises question mark
Data from the Bank of England on mortgage lending has surprised and on the downside.
UK mortgage approvals stood at 59,023; last month, compared to 60,045 in November. Analysts had expected to see a modest rise. To be honest, it can be quite irritating when commentators start reading things into one months’ worth of data. The drop may represent a change in the market, or equally it may be a statistical glitch. There is no way of knowing. All we can say is wait until next month, and that will give us a better idea.
The first bus carrying bears
A new report by David Steven entitled Time to Stop Betting the House: mortgages, resilience and the long finance, has taken a somewhat contrary view. And in the process slammed the FSA.
The FSA has criticised banks for being too limited in assessing risk, and yet, says the report this is precisely what the FSA is doing now. It said our beloved regulator of the financial industry is more interested in safeguarding banks then the consumers who use them and said the FSA is indulging in what it called “fig leaf” regulation. The report said: “Far from proposing fundamental regulatory reform, the FSA’s package of proposals offers a modest change to the status quo.”
The report made three key arguments:
First that “The FSA has failed to understand the scale of challenges facing the British mortgage market, which represents one of the greatest sources of financial risk facing the public.
Secondly, that “Its regulatory reforms, far from offering the ‘one-off shift’ that Adair Turner has promised, are timorous and unfit for purpose.”
And thirdly that elevated house prices “leave over-leveraged borrowers highly vulnerable to future economic volatility – with the potential for a second housing crisis to come sooner rather than later.”
See: Time to Stop Betting the House by David Steven for more.
Affordability
The CEBR bangs the drum of affordability. House prices are high, but interest rates are low, therefore prices will go up. And it is joined in the affordability camp by the Council of Mortgage Lenders (CML), who recently made much of their claim that aside from a brief period in 1996, mortgage affordability is the best on record.
But Capital Economics has laid into that claim.
Firstly when drawing its comparison with the past, CML only looked at the cost of repaying mortgages relative to gross income. If instead you look at disposable income, a different picture emerges. Don’t forget, for example, that until a few years ago tax relief was available on mortgages.
Secondly, CML only look at the cost of repaying interest, and ignore the cost of re-paying capital.
Investment and Business News analysis
The report from David Steven is right, and it is a theme we have touched on many times. The UK has become reliant on rising house prices as an engine of growth. The result is that the UK’s populace has become more indebted than in most countries. Some dismiss this, they say the Brits are in debt because they have more mortgages. The UK’s public expectations, that have, in part, been encouraged by media coverage, increases the chances of further rise in house prices
But, defenders of the housing faith ignore the fact that the UK is especially vulnerable to some future shock. So should interest rates rise, or should taxes be forced up squeezing our affordability, the result could be a new crash in house prices creating a new set of problems for banks. If house prices do indeed rise over the next few years, as the CEBR predicts, this will leave the UK terribly vulnerable to a future change in conditions, and increases the chances that the UK will eventually experience a Japanese style lost decade or two – or a period of economic stagnation lasting even longer.
For more see House prices, the future, the definitive article
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