By Michael Baxter 13 Jul 2010 [0 Comments | 439 views]
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If you go down to the woods today, you are sure of a big surprise, for every bear that ever there was, will gather there for certain because, today’s the day that housing bears have their picnic.
2009 was a puzzle. The UK economy was in the midst of the deepest recession since the dinosaurs became extinct (or at least since before the author was born, which is much the same thing), and yet the great, long predicted crash in house prices came to a shuddering halt, and then moved into reverse.
Property bears, that is to say those creatures who believe a crash in house prices is as inevitable as four-yearly disasters for the English football team, had their faith tested to its very core. Property bulls, that is to say those creatures who believe rising house prices are as inevitable as four-yearly saturation of the TV schedule with football matches, said: “TOLD YOU SO.”
The truth is, the reasons behind the recovery in the housing market are quite complicated. See: Why did house prices rise in the depths of recession?
But whatever the reasons for the 2009 recovery, evidence out this morning suggests things are changing.
The latest survey from the Royal Institution of Chartered Surveyors (RICS) pointed to the most significant change in the dynamics of demand and supply since the days leading up to the housing crash.
Also in the news today are two separate reports; one predicting anaemia for the UK housing market for the next decade, another providing evidence on why it is that overreaction can often be the biggest factor that lies behind crashes and booms.
Then there’s the ‘big three’ and the Bank of England. The last ten days or so have seen the latest housing surveys from the Halifax, Nationwide, and Hometrack. The picture that emerges from these reports is getting clearer, with growing evidence that house prices are turning down again. And this evidence seems to be supported by the latest data from the Bank of England on mortgage approvals.
RICS points down
Every month RICS asks its surveyors if prices were up or down in their region. It takes the percentage number who said up, deducts from that the percentage number who say down, and out the other end comes its headline index. In June the index stood at plus 9, so it is still positive. But this was the lowest reading since July 2009. In the previous month the index stood at 26, and in the last few months of 2009 was in the low 30s. If the index continues to fall and goes negative, then it will be undeniable that house prices across the land are falling again.
And it does indeed seem likely this headline index will turn negative soon. First off, the RICS index tracking price expectations has turned negative.
But more significantly, the index tracking new instructions (which determines new supply) rose to its highest level since May 2007, with a score of plus 27. The index tracking enquiries (which determines new demand) turned negative, at -5.
RICS also publishes the ratio of sales to stock, which is based on sales over the previous three months to total stock. The ratio fell to 25 per cent, the lowest level since June 2009. To put this in context, in 2008 the ratio was even lower, at one point around 12. But then again, during the boom the ratio rose above 60.
The point is, however, that the indicators are pointing towards falls in this ratio.
So RICS points down; what do the Halifax, Nationwide, Hometrack and Bank of England data say? Click here for the answer (but there is a clue in the heading):
Halifax sees house price fall for third successive month
PwC joins the bears
Meanwhile, PwC has made a prediction to make all bears chomp on their picnic with renewed glee.
The giant firm of accountants reckons there is a 70 per cent chance that the real cost of property in 2015 will be lower than the 2008 level, and that there is a 50 per cent chance that prices will not rise above their previous peak (that’s adjusted for inflation) until 2020.
John Hawksworth, who is in charge of macroeconomics at PwC, said: “Although the average house price overvaluation of around 25 per cent in mid-2007 is down to around 5 per cent-10 per cent despite the rally since March 2009, our analysis suggests that house prices remain vulnerable to setbacks.”
Mind you, not all agree. Earlier in the year, cebr predicted that house prices in 2013 would be 26 per cent up on the 2009 level. See: cebr updated house price forecasts show continued rise – with mortgage rates falling from 4% to 3% within next year
Then there’s the FSA. It may be making things far worse for the housing market. See: FSA wants to end self-certified mortgages
And finally
So, it seems the evidence that the housing market is turning is now becoming pretty overwhelming. We will have to wait another month of course to see whether the new trend continues.
But right now, it appears the chances of falls in house prices later this year and next are very high indeed.
But does it matter?
This is what PwC’s John Hawksworth said: “While it can be argued in theory that house price changes have little effect on overall UK wealth, our econometric analysis suggests that an unanticipated future fall in house prices could have a significant impact in dampening the speed of the recovery in consumer spending in the medium term.”
Of course he is right. The reason why savings were low during the boom was not because we had become a nation of reckless spenders. It was because we had been fooled by rising house prices into thinking we were doing better than we really were.
There is a real danger that if house prices once again go on a downward trajectory we will be fooled again, but this time in the opposite direction; we will save, fearing for the worst, and as a result, aggregate demand will crash and the worst will become more likely to happen.
