House prices are up again. The data provides overwhelming evidence. But what is especially compelling is the latest survey from the Royal Institution of Chartered Surveyors, or RICS. Its residential survey market index it not merely a good guide to the UK housing market, it is a good guide to the UK economy. The occasions in recent years when the index has moved from negative to positive has often preceded economic recovery. Occasions when it has gone from positive to negative, has often preceded a recession – or at least a sharp fall in growth. The index is now unequivocally in positive territory.
Can it last? Do we want it to?
It was unanimous. For the month of June, Hometrack, Nationwide and Halifax all recorded rises in house prices.
Hometrack had prices rising by 0.4 per cent in the month compared to May. It said: “The momentum in house price growth over the first half of the year has been driven by a widening imbalance between supply and demand…Two factors are adding to the pressure on supply – first is an increase in numbers of first time buyers who add to demand but have no property to sell.
Secondly, existing owners are looking to secure a property to buy before putting their homes on the market.”
The Nationwide had prices rising by 0.3 per cent in June, and year on year recorded a 1.9 per cent rise. Robert Gardner, Nationwide's chief economist, said: “Construction data point to a further decline in building activity in recent quarters from already depressed levels. For example, in Q1 2013 housing completions in England were down 8 per cent compared to the same period of 2012 and around 40 per cent below the average number of quarterly completions in 2007.”
The Halifax House Price Index recorded a 0.6 per cent month rise, and a 3.7 per cent year on year rise. Martin Ellis, housing economist at Lloyds TSB, said: "Improved confidence in both the housing market and the economy, combined with a shortage of properties available for sale, appear to be pushing up house prices. The Funding for Lending Scheme is also likely to be boosting the market by helping to reduce mortgage rates. There are also early indications that the Help to Buy: equity loan scheme may be stimulating demand. Despite these signs of improvement in the market, the still subdued economic background and weak income growth are expected to remain significant constraints on housing demand and activity during the second half of 2013."
Finally there is RICS. Its survey found that 21 per cent more Chartered Surveyors reported that prices rose rather than fell in June, making this the strongest month for house prices since January 2010.
What is especially interesting, however, is what surveyors polled by RICS think might happen next. A net balance of 45 per cent more respondents (from 36 per cent in May) predicted that sales will increase. This is the most positive reading in this series’ history, which began in April 1999.
So there you have it, the RICS index suggests the market in May was the strongest since January 2010. As for expectations of sales, it is the strongest ever, although admittedly in this case forever only goes back to 1999.
There are snags. First off, house prices are so very expensive. According to Halifax data, the ratio of average house prices to the national earnings average for men is currently 4.58. Okay, it has been higher – 5.83 in July 2007, but in January 2000 the ratio was 3.37. In March 1989, just before house prices crashed, the ratio was 4.97. According to OECD data, the ratio of house prices to income is 22 per cent over the long term average, and the ratio of average price to rent is 31 per cent over the national average.
The second snag relates to wages. In April of this year inflation –as measured by the CP index – was 2.4 per cent. Average wages, including bonuses, rose by 1.3 per cent. In fact inflation has been greater than rises in wages every month since May 2010. According to the ONS, household annual income has fallen by £1,200 in real terms since 2007/08 or at least equivalised income has, which is a measure that attempts to weight data to balance out the fact that some households are much bigger than others.
So there you have it, households are struggling, as indeed they have been for a long time, yet house prices are rising. Working out why is not rocket science; it is because interest rates are at record lows; it is because of the government’s own schemes to kick life into the market, and it is because of lack of supply, which is not helped by planning regulations that need reforming.
Maybe there is another factor at play, too. It is as if there is something hardwired into the British psyche – an inbuilt belief that house prices only ever rise; that your home is an investment; that there is this thing called a housing ladder upon which you need to climb, and ascend as soon as possible. All of these assumptions are open to debate, but in the UK they are rarely even questioned. Such attitudes can become self-fulfilling.
In the short run, rising house prices are good for the economy. But we have been here before haven’t we? We were here in 2007. The truth is that the UK boom of the mid noughties, and recent rises in spending have been fuelled by falling savings.
And that brings us the nub of the problem. UK households need to save more – that is self-evident. If we secure a recovery by reducing savings, this is simply storing up problems for later. Equally, if Brits do save more, consumption falls, and – all else being equal – GDP falls.
But supposing savings are used to fund investment. And remember, the UK badly needs more investment. Such investment will in part solve one of the UK biggest problems of all: poor productivity. Greater savings leading to greater investment could create an economic recovery that is sustainable. Alas instead, savings seem to fund credit for the mortgage industry. Instead of more investment, we get higher house prices.
It is a vicious circle, and – as far as the UK is concerned – it really is vicious.
So what are the solutions? There are several: a falling pound, or investment funded by QE may top the list.
© Investment & Business News 2013