They say even dead cats bounce, and that’s equally true of markets. While I wouldn’t be surprised to see this week’s stock market rally turn into something more substantial over the next 18 months, I’d be shocked if UK house prices are higher in 2010.
I write this in the light of yesterday’s report from Nationwide that UK house prices had risen 0.9% in March compared to the previous month, taking the annual rate of house price falls from 17.6% in February to 15.7%.
That 0.9% rise is a seasonally-adjusted figure, too – the non-seasonally adjusted jump was much higher.
Nonetheless I suspect house prices still have someway to fall, and indeed am banking on that by further delaying my entry into the property market.
Here’s a few quick reasons why I think we haven’t seen the end of price falls.
1. Prices overshoot both ways
Take a look at the graph above from Nationwide. It’s true that after the steep decline of the past 12 months, prices would appear to be back on the trend line.
But notice that in previous downturns, prices have fallen below trend (and for several years in the 1990s).
It’s clearly not impossible for prices to come back hard (look at 1981) but given the factors below, I think it will be some time before prices rise strongly again.
2. Mortgage lending is (permanently) constrained
According to figures from the Bank of England last week, mortgage approvals rose from 32,000 in January to 38,000 in February.
That’s a bullish sign, but is it the start of a recovery? Personally, I suspect not.
There’s no doubt the downturn in the past 12 months has been hugely accelerated (and distorted) by the reluctance of lenders to lend. With the credit markets frozen, reduced bank lending against falling house prices has been a self-perpetuating cycle. Any new lending down has been made against bearish estimations, further reducing the values logged by Halifax and Nationwide.
So this jump is significant – assuming it’s sustained rather than just a blip as a result of built-up pressure.
But commenting on the rise, the think tank Capital Economics said approvals would need to roughly double to no longer be consistent with an environment of falling house prices. I’ve seen other calculations suggest around 85,000 approvals per month would be needed.
Even if we do return to this sort of lending volume, we’re simply not going back to the old parameters in the foreseeable future.
Northern Rock has gone bust and its 125% mortgages have gone with it. Indeed, the FSA is talking about banning 100% mortgages completely, even if lenders want to advance such money.
This is important because without the lending that underpinned the last boom, you can’t recreate the prices until salaries catch up. Cash buyers can only go so far.
3. Unemployment is rising
UK unemployment cleared the two million mark in March, the worst figure since 1997 (which incidentally is when the housing market last pulled itself out of the doldrums on a country-wide level).
House prices will not rise while more people are being made redundant, for the very simple reason that jobless people can’t get new mortgages, while others who already own houses will struggle to make ends meet, which unfortunately will lead to many seeing their homes repossesed.
Remember, house prices are dictated by the margins. Even if most people keep paying their mortgage, if there’s lots more property coming on to the market from desperate sellers (or banks) than there are buyers ready to take up the slack, then prices will fall.
4. House prices are still out of whack with rents
A long time ago I (along with others such as The Economist) concluded house prices would fall due to the fact that it cost more to buy a house than to rent it.
I was too early, but eventually the theory came right. Read my post from 2007 (written well before the crash started) on rents versus prices for more information. (I must admit that I haven’t done an in-depth study of UK house prices versus rents for a while. I’ll try to redress that soon).
Clearly, falling house prices and falling interest rates make buying a house more affordable, and potentially bring prices more in line with rents.
But the fly in the ointment is that rents are falling, too.
According to the BBC:
The cost of renting a home has continued to fall as UK householders let out their homes in a bid to beat the recession.
Two surveys suggest that there has been a surge in properties available to rent, pushing down costs for tenants.
Tenants, aware of the falling prices, have started to haggle.
As I say, I need to redo my figures to see how house prices currently compare to rents, but going on my own rented house, I’d suggest prices still need to fall quite a way for renting and buying to come back into line.
I’ve not mentioned a few other factors, such as the costs of servicing a huge debt in a deflationary environment (one reason Japan saw prices fall for more than a decade), or the alternative likelihood of inflation and thus the higher interest rates I suspect we’ll eventually see as a result of quantitative easing.
Either outcome would result in a push-me, pull-me muddle of broadly flat prices.
But while I’ve been a housing bear for years, I admit prevailing low interest rates should keep the crash shorter and shallower than in the early 1990s.
So will prices be higher than today by 2015? I suspect so, absent a second Great Depression. But will they be higher in 2010? I doubt it.