Archive for the ‘House Prices’ Category

350

As far as the Bank of England is concerned, the inflation panic is over for now. You may recall that many feared that one of Mark Carney’s first acts as governor of the Bank of England would be to put pen to paper and knock off a quick letter to George Osborne explaining why he was doing such a bad job at keeping inflation close to target. If inflation moves by more than one percentage point above the 2 per cent target, the UK’s most powerful central bank is required to write a letter of explanation to the chancellor.

As it turned out, inflation was 2.8 per cent in June – less than was feared and 0.2 percentage points down on the level that would have triggered a letter. This week the data for August was out, and this time inflation was just 2.7 per cent.

Will it continue to fall? Answer: unless something odd happens, surely yes. For one thing sterling is up, and recently rose to its highest level against the euro and dollar since January. For another thing, past movements in commodity prices suggest food inflation should fall sharply.

But thirdly, sheer maths seems to make it inevitable. Last autumn the UK saw prices rise quite sharply – up 1.5 per cent between August and December. Between May and August, prices rose by just 0.2 per cent. If the inflation rate we have seen over the last three months continues for the next three months, annual inflation will fall to just 1.3 per cent.

Now look at house prices and apply the same approach.

349

According to the ONS, house prices rose by 3.1 per cent in the year to July. But between August and December last year, houses prices fell slightly. If house prices rise at the same pace seen in the past five months over the next five months, then that will mean house price inflation will be running at 9.4 per cent by December.

Yesterday’s ‘Daily Mail’ headlined: “Property price bubble is a MYTH”, and described the latest 3.3 per cent house price inflation rate as “modest”. But simple maths shows why this will change very soon and a bubble is, in fact, being created in our midst.

© Investment & Business News 2013

347

George Osborne recently tried to assure us. “I don’t think in the current environment a house price bubble is going to emerge in 18 months or three years,” or so he told parliament this week. The Bank of England governor promises us he won’t let it happen – no bubble here, thank you, not today, tomorrow, or for as long as he is boss. Yet a poll among economists found that around half reckon a new bubble in the market is likely. The latest survey from the Royal Institution of Chartered Surveyors (RICS) may even provide evidence that such a bubble is underway right now. Why then, do we see such complacency? And how dangerous is it?

Actually the no bubble here argument seems to come from two different sides of the spectrum of economic thought. There are those, such as Capital Economics, who tend to be on the bearish side. House prices won’t shoot up in price, it suggests, because prospective new home owners can’t afford higher prices, and real wages are, after all, still falling. From the other side of the spectrum seems to come the view that there is no bubble because the very word bubble seems to suggest something negative. It may be true to say that this other side of the spectrum sees rising house prices as a good thing.

Okay, let’s look at the surveys. The latest Residential Market Survey from RICS may or may not provide evidence of a bubble but it certainly seems to provide evidence of a boom. The headline index, produced by taking the percentage number of surveyors who said prices fell in their region from the percentage number who said they rose, hit plus 40 – that’s for the month of August. It was the highest reading for the index since November 2006. The survey also found a rise in supply as more properties come on the market, but that the rise in demand was even greater.

As has been pointed out here before, the RICS index is not only a good guide to the housing market, it seems to provide a good barometer reading of the UK economy. The trajectory of history of this chart, and its correlation with the GDP a few months later, suggests the UK economy is set to see growth accelerate.

Now let’s turn to the other survey. This one comes courtesy of Reuters. A total of 29 economists were surveyed and asked about the prospects of another housing bubble. Nine said the chances are small, seven said the chances were even; 11 said likely; two said very likely.

Mark Carney suggests, however, that he won’t let it happen. He recently told the ‘Daily Mail’: “I saw the boom-bust cycle in the housing sector, the damage it can do, the length of time it took to repair.” These are encouraging words. He is saying trust me. Just bear in mind however that a housing bubble appears to have developed in Canada during his time as boss of the country’s central bank.

George Osborne turned his attention to the topic. On the subject of loan to value ratios, and the way in which first time buyers have had to find such enormous deposits in recent years, he said: “This change is not something we should welcome. It is both a market failure and a social problem – imagine if you’d had to find twice as big a deposit for your first home. 90 per cent and 95 per cent LTV mortgages are not exotic weapons of financial mass destruction. They are a regular part of a healthy mortgage market and an aspirational society.”

Here are two observations for you to ponder.

Observation number one is the British psyche. It is as if it is hardwired into the DNA of the British public. They are driven by fear to jump on the housing ladder, driven by more fear to rise up it, yet without questioning the view they believe that when the equity in their homes rises, they are better off, have more wealth, meaning they don’t need to save so much for their retirement. In short the UK housing market is prone to bubbles. The UK economy can often boom when house prices rise, and the reason is deep rooted in the British psyche. Whether this is good thing or not is open to debate. However, this point about the psychology does not seem to be understood by many economists, the markets or the government.

Observation number two: The new governor of India’s central bank Raghuram G Rajan used to be the chief economist of the IMF. Between his stint at the IMF and his new role in India, he wrote a book called ‘Fault Lines’. In it he suggested that rising house prices was the way in which democratically elected government were able to compensate their electorate for the fact that their wages had only risen very modestly. Mr Rajan was not suggesting a conspiracy; merely that the economic fix found by authorities proved to be the path of least resistance.

A boom in which the UK economy becomes more dynamic, maybe one in which QE funds investment into infrastructure, entrepreneurs, and education, creating a work force better equipped to cope with the innovation age we now live in, would be a wonderful thing. A boom based on rising house prices, however, would be a much easier thing to create, so no wonder Mr Osborne is so keen on the idea.

© Investment & Business News 2013

file0001889793595

If you are a regular reader here, you will know that Investment and Business News has long considered the Residential Market Survey from the Royal Institution of Chartered Surveyors (RICS) as just about the best barometer of the UK housing market – and to a lesser extent the UK economy – out there. For example, in August 2007 the RICS headline index went negative and stayed there for two years. The index moved back into positive territory in August 2009, but the move was not convincing and by July 2010 it was negative again. The index is in positive territory again, but this time it feels a little more permanent; a little more meaningful. It may be the best evidence yet that the UK housing market and the economy are in the best shape since the recession of 2008.

The survey asks: “How have average prices changed over the last 3 months? (down/same/up)”. The percentage number who say down is subtracted from the percentage number who said up, and the balance forms the RICS headline index.

In April the index went positive – just, hitting plus 1. It was skin of the teeth positive, but nonetheless it was the first positive reading since June 2010. The index rose in May, and again in June. This morning data for July was out, and the Index rose to its highest level since 2006, just topping the plus 35 reading posted in November 2009.

Another index, tracking new buyer enquiries, rose to plus 53.

337

RICS said: “Government measures to stimulate the market (including both Funding for Lending and Help-to-Buy) appear to be part of the reason for the pick-up in activity according to survey respondents. The former, in particular, has played a role in helping to improve mortgage availability; the survey suggests that surveyors perceive there has been a rise in typical loan-to-value ratios on offer for first time buyers seeking a mortgage. In July, this may have risen to 83.6 per cent, which is two percentage points higher than at the end of last year.”

This is all positive stuff. Just don’t forget that real wages are still falling; they have been falling every month since May 2010. It is hard to see how the surge in housing activity can be sustained when average workers are getting worse off

If you want to be ultra-bullish, you might want to argue that the surge in house prices will give consumers more confidence to spend, leading to more demand, more jobs and then higher wages, making the recovery in the housing market sustainable. In other words, recovery based on hot air can create a recovery based on something real.

If you want to be cynical, you can say: “But isn’t that what happened in the early and mid noughties, and didn’t all end in tears?”

© Investment & Business News 2013

file0001306611125

George is blowing a bubble, and no this is not a reference to the royal baby, rather to the right royal mess George Osborne may be creating with his Help to Buy scheme. The list of those accusing our chancellor of creating a new housing bubble is getting longer. But then our George says he is just trying to create a construction boom, and if he can do that, this will surely be a good thing. So which one is it: construction boom or housing bubble?

Help to Buy comes in many guises. New Buy, was a scheme aimed at first time buyers and provided assistance solely if they bought a new home. So the idea behind the scheme was actually quite laudable. But the latest iteration is not like that. This is destined to help people who can only rustle up say a 5 per cent mortgage.

Home builders say that the latest idea will encourage them to build more, but then, frankly they would say that wouldn’t they? What house builders really want, what they really really want is for house prices to go up in value enabling them to build and sell homes for a very substantial profit on land which they have already paid for.

This week credit ratings agency Fitch stated: “The scheme, [that’s Help to Buy] along with the phase that began in April [New Buy] could have an impact on sovereign gross debt and its dynamics, particularly if there is strong pent-up demand as the tighter loan-to-value ratios that have prevailed since 2008 are relaxed.” It continued: “For house builders the main benefit from the second phase of the scheme will come from rising house prices, rather than increased volumes.”

A couple of weeks ago Vince Cable warned that a housing bubble was a danger, and the IMF made similar warnings before that.

Oh why, oh why won’t George listen?

It is just that according to a housing construction survey from the Royal Institution of Chartered Surveyors (RICS): “59 per cent more respondents predicting workloads continuing to rise rather than fall once more.” According to recent data from the ONS, construction activity grew by 0.9 per cent in Q2. The latest Purchasing Managers’ Index from Markit/CIPS for construction rose to its highest level since June 2010.

This is good stuff. Apparently, or so says RICS, every pound spent on construction leads to £3 more economic growth, so that is a good thing. On the other hand, to put the construction boom in perspective: in Q1 2013 construction output was at its lowest level since Q1 2001.

Is George blowing bubbles or creating a construction boom? The most likely consequence is that this is doing both, and that is both good and bad.

© Investment & Business News 2013

file1241241390188

It is a little odd. The UK enters its worst downturn ever recorded; average wages increase at a rate that is much slower than inflation meaning that for some time average households have been getting worse off, but what do house prices do? Sure they crashed in the US; they crashed across much of Europe – especially in the troubled parts of the region – they crashed in the UK once too, but that was back in the 1990s.

But this time around, prices fell – a bit – but right now, and without doubt, they appear to be on an upwards trajectory. Some say there are similarities between the UK economy over the last few years and Japan 20 years ago. There is one glaring difference, however. In Japan house prices crashed and went on crashing. In the UK, the story has been quite different. So why is that? And can we expect a happy ending for the UK housing market?

Now Vince Cable has joined the ranks of those who fear that the government may be creating a housing bubble. He was interviewed on the ‘Andrew Marr Show’ yesterday, and said: “I am worried of the danger of getting into another housing bubble.” But frankly the warnings have been coming from every quarter and indeed from every quintile or even decagonal.
There is more than one side to this debate. What the UK needs is more construction, and more new houses.

One figure being bandied about at the moment is that every pound spent on construction stimulates the economy by £3. A residential construction boom needs mortgages to be made available. The danger is that mortgage supply will rise, demand for housing will increase but supply won’t. If that were to happen we might get higher house prices, but it is questionable whether UK plc will be better off.

In fairness to the chancellor he is trying. When he recently unveiled his latest initiative for his Help to Buy Scheme, he invited house builders along to hear his announcement first hand. And there are signs of a pick-up in construction. After falling to its lowest level since 2001 in the first quarter of this year UK construction activity rose 0.9 per cent in Q2, according to the ONS.
A rough rule of thumb might go like this: a buoyant mortgage market leading to more construction is good, but one leading to higher prices but not more construction is bad.

Yet the UK media seem obsessed with the idea that rising house prices is a good thing. If we get the slightest hint that house prices are set to rise, certain newspapers splash it all over their front cover. In recent days we have seen the media say over and again: the weather is hot, Britain is winning in sport and house prices are going up!

But why is it really seen as a good thing when house prices rise? Why are the UK public so convinced house prices can only ever rise? One argument to justify the argument that house prices can only ever rise in the UK is that the UK is an island and land is in limited supply. If that is so, how is it that house prices have fallen in Japan, which you may have noticed is also an island based economy?

Ex MPC man – a man famous for his ultra-dove-like view on monetary policy, a man who continuously voted for more QE, and indeed called for QE being used far more imaginatively – Adam Posen penned a piece for the ‘FT’ this weekend and he made a good case. In an article headlined “The cult of home ownership is dangerous and damaging”, Mr Posen said: “There is no iron law that higher-income economies must have higher rates of home ownership: Mexico,

Nepal and Russia all have home-ownership rates of more than 80 per cent, while the French, German and Japanese rates are 30-40 percentage points lower. The US and the UK rates sit between them at about 65 to 70 per cent.”

Mr Posen’s main point is that because in the UK our home is our main financial asset, he said: “We incentivise middle-class households to leverage the bulk of their savings into a highly volatile, difficult to price asset.”

There is one point about the housing market which gets overlooked. Sure housing has proven to be good investment over the last few decades, but the reason for this is not because house prices keep going up, it is because housing investment is just about the only form of investment available to the mass market that employs leverage.

You borrow 75 per cent of the value of a property, and the property doubles in value, your equity increases fivefold. Leverage is also available to private equity companies, which is why they enjoyed a boom during the noughties, but leverage of investment trusts was one of the factors behind the stock market boom that led to the 1929 crash. Leverage is appealing but it is also dangerous.

But here is a theory – just a theory – as to why the Brits so love the idea of house prices as an investment.

The Brits have bought into a story. It was a story that had its roots in the 1960s and 1970s. At the beginning of this period, house prices to income were quite cheap. Over the following two decades four things happened. Firstly, as mortgages became more widely available, house prices to income rose. Secondly, as productivity grew, real wages rose. Thirdly, inflation meant nominal incomes rose very sharply. Fourthly, for much of this period, real interest rates were negative, that is to say the percentage rate of interest was less than the percentage rate of inflation. These four factors, when combined with the magic of leverage, made buying a house an incredibly lucrative thing to do.

During this period the idea was born that when you enter the housing market the best thing to do was buy the most expensive property you could. This period also saw the birth of a new metaphor, ‘the housing ladder’. The story that emerged during this period is so strong that people still think its lesson applies today.

But is that right? House prices are no longer cheap relative to incomes. Real incomes have not been rising for some time. Nominal wages have been rising only very slowly. Sure, real interest rates are negative again. But what will happen when the baby boomers retire, and many of them try to downsize, using the spare equity in their homes? What will happen if real interest rates rise, because of actions beyond the control of the Bank of England? See: The Great Reset 

The narrative of the UK housing market suggests that house prices always go up. But many of the facts that created that narrative have changed.

When pieces of the narrative are changed at a later date, the overall initial impression is unaltered. The narrative changes us, and retrospective changes to the narrative don’t reverse the original effect it had on us. If we were to find out years after we first heard the story that that actually Cinderella, was a manipulative little so and so, we would probably still think she had an evil step mother and sisters.

Until that is the narrative is proven to be wrong beyond any doubt. But by then, it may be too late to do anything about it.

For other examples of the power of the narrative see:

The narrative: Suckers for a good story

Property bubble: is this a yarn that can only ever have an unhappy ending? 

Is BP a victim of the narrative? 

Entrepreneurs need to diversify more

Facebook results: suddenly its valuation does not look so daft 

© Investment & Business News 2013

file0001597083839

House prices might be rising in the UK, but that is not what’s happening across most of Europe.

According to new data from the EU Commission, house prices across the Eurozone fell 2.2 per cent year on year in the first quarter of this year. Across the EU they fell 1.4 per cent.

Among the Member States for which data are available, the highest annual increases in house prices in the first quarter of 2013 were recorded in Estonia (+7.7 per cent), Latvia (+7.2 per cent), Luxembourg (+4.3 per cent), and Sweden (+4.1 per cent), and the largest falls were seen in Spain (-12.8 per cent), Hungary (-9.3 per cent), Portugal (-7.3 per cent), and the Netherlands (-7.2 per cent).

In France they were down 1.4 per cent. They fell 5.7 per cent in Italy, 3.0 per cent in Ireland, and 0.4 per cent in Cyprus.

The latest data for Germany is not yet available, but in Q2 2012 they rose 2.3 per cent, year on year.

According to recent OECD data, when comparing average house prices to rent, they are 71 per cent above the historic average in Norway, 64 per cent more than average in Canada, 63 per cent more in Belgium, 61 per cent in New Zealand, 38 per cent in Finland, 37 per cent in Australia, 35 per cent in France, 32 per cent in Sweden, and 31 per cent in the UK.

Prices to rent are below the historic average in the US, Japan, Germany, Italy, Czech Republic, Greece, Ireland, Iceland, Portugal, Slovak Republic, Slovenia and Switzerland. In the case of Japan, Germany, Greece, Ireland, Portugal and Slovenia they are less than 80 per cent of the average relative to rents.

© Investment & Business News 2013

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