Another week, another story about how house prices are rising once more. Disaster has been averted! We can all go out and spend the free money that's being built up in our property! Recession over!
This leads me to ask: Why are house prices rising?
Wait a minute, as I remember, when prices started falling, this was a correction that would return the prices to historic levels. Now the prices are going up, everyone seems to have assumed this has happened.
I decided to pull some data (admittedly from Nationwide, rather than the Halifax quoted in the story above) and see what the situation looked like.
This first graph shows the Nationwide Affordability index over the past 16 years. I've shown the figures for UK and London (which is probably a special case, possibly due to all the MPs owning the most expensive properties they can get us to pay for).
We can see pretty clearly that during the mid-90s the market corrected down to an index of 40/50 (It's also interesting that it's only since this time that the London market has had an index of roughly 10 more than the UK as a whole). This data only goes up to Q2 2009 but you can see where the market has started to turn. This looks pretty close to the long term average (which includes two peaks, and only one dip, but I couldn't be arsed to correct for that). Perhaps the market has managed to perfectly hit this average and will stay there forever. Boom and Bust abolished! I'm sure I've heard that before somewhere.
I would argue that in a rational world (and don't worry, I'm under no pretence we're in one of those!) that house prices need to fall a long way further. And if the previous graph didn't convince you, check this one out comparing the price paid by first-time buyers to their income.
This leads me to ask: Why are house prices rising?The obvious explanation is to look at the FTSE 100 and assume that both are pricing in future inflation and a falling Sterling.
Whilst I'd agree that this is rational for the FTSE 100 and I can see the logic in pricing in future growth into current house prices, I can't see any avenues to future growth for house prices.
There will be a nasty day ahead when the BoE base rate rises. This will drive up the cost of mortgage payments (remember, BoE base rate was about 5% before all of the recent unpleasantness). Unemployment is and will continue to rise for some time and these people will be unable to afford this rise in their mortgage payments. More defaulted mortgages (which will piss off the banks, but they should have enough of our money to cover themselves now) and more houses on the market at increasingly fire-sale prices.
There is pain ahead in the housing market that will make the last two years look like a trip to the Seychelles. The depressing thing is that I'm pretty sure that this will be the least of our problems.
Time to start stocking up on canned food?
I still work on the basis of 3.5x gross salary: as a first-time-buyer, until I can afford a flat or a small house for that, the market is overpriced.
ReplyDeleteRidiculously low credit costs are what inflated the bubble in the first place, so I don't think keeping the BoE rate at a 400-year-low is going to help. And when it rises, as you say, people will default in huge numbers and over-supply the market, crashing house prices.