Are we about to see the perfect housing market correction?

I’ve recently become a renter again, having been a homeowner for the last ten years or so.

I’d like to pretend that I’ve stepped off the housing ladder in a deliberate attempt to make a spectacularly ballsy bet on the direction of the UK housing market over the coming months.

The reality is far more prosaic. We had intended to buy, the deal fell through, and so we ended up renting.

That said, now that I’m getting up close and personal again with the insane dynamics of the British housing market, I’m inclined to pay even more attention to what’s going on than I normally do.

And it hasn’t escaped my notice that news on the house price front has been rather weak of late.

So have I got lucky? Or am I doomed to fall foul of the oldest mantra in British investment: “You can’t go wrong with bricks and mortar”?

The UK housing market is drying up

The Royal Institution of Chartered Surveyors (Rics) just issued a pretty downbeat report on the UK residential property market. Every month, Rics gets the street-level view of the property market from estate agents and surveyors around Britain. The figures for last month were among the weakest seen since the financial crisis.

Seller numbers are down, as has been the case for over a year now, notes Capital Economics. Over the long run, there are usually more than 60 properties on sale per surveyor. Last month, it was just 43.8. Falling supply is partly down to weak demand – no point on selling if no one is buying – and the survey confirmed that buyer numbers are down too – demand has been flat for five months in a row.

With both buyers and sellers going on strike, transactions are falling too – an estate agent’s worst nightmare, much more irritating than falling prices.

Rics members still reckon – on balance – that house prices are rising. This may reflect the fact that the survey is less swayed by London than simple house price averages – prices in London are weaker than in the rest of the UK right now.

However, both Halifax and Nationwide – who provide two of the longest-running data series – reckon that UK-wide prices peaked in December 2016.

So is this just a breather (after all, at the start of last year we saw the big rush to beat the second-home stamp-duty surcharge)? Or is the start of something more serious?

I’m not convinced there will be a house-price crash

Much as – for purely selfish reasons – I’d like to see prices fall by a decent chunk, I struggle to see how it would happen.

It’s pretty clear that prices in the richest parts of London peaked a while ago and in many cases have since dropped sharply. But a lot of those properties are special circumstances. There’s been a whopping great stamp duty increase on the highest-end homes. Conditions for overseas buyers have been made a little less hospitable.

And as my colleague Dominic Frisby highlighted ages ago, there’s been a glut of “luxe” developments that have little appeal to anyone other than the emerging-market property investor with money to burn. Not to mention the fact that the high-end London market is the one that had seen prices shoot up most dramatically. So there are some very good and specific reasons for that market to struggle.

As for the rest of the country – well, it’s less clear. There are still plenty of parts of Britain where prices have only just regained their previous financial crisis-era peaks (and we’re not even talking “real” – after inflation – terms there).

And the biggest threat to house prices in the UK – a rise in interest rates, and thus mortgage rates – seems distant for now. Yesterday, the Bank of England issued its latest inflation report, alongside minutes from its latest meeting, and it doesn’t seem to be in any mood to raise rates – certainly not this side of an election.

The Bank always likes to fudge things so that it doesn’t get too predictable (predictability is the enemy of central bankers – you have to be able to bluff convincingly if you really want to make the market do what you want it to). So it did warn that there might be call for a rate rise in the second half of the year, and that it wouldn’t tolerate inflation going too far above target.

But no one had joined Kristin Forbes in voting for a rate rise. The Bank was also downbeat on household consumption prospects, even although it reckons that first quarter GDP growth will end up being revised higher. The warnings about inflation also ring a little hollow given that it’s been above target for the past three months already, and the Bank expects it to hit 2.7% by June.

So a rate-induced slide in house prices seems unlikely. However, at the same time, the fact remains that prices are just too high, even with mortgage rates where they are today. High prices, low affordability – but no obvious trigger to force prices lower. What’s the answer?

The obvious solution – and perhaps the one we’ll get – is for prices to fall in “real” (after-inflation) terms, rather than nominal terms. So prices will fall relative to wages. Overall, the market stagnates, until wage inflation has allowed the price/income ratio to fall to something approaching a more reasonable level.

Meanwhile, “stranded” renters should benefit from last year’s rush to beat the stamp duty rise on second properties. Rents in many parts of the country – London particularly – have dipped amid a big influx of new rentals hitting the market.

An inflation-driven correction in the housing market would avoid all the problems you’d get with banks’ balance sheets if prices were to fall in nominal terms. It also solves the problem of reluctant sellers clogging up the market. People think in nominal terms, so they don’t care if the big round figure that they believe their house “should” be worth is actually worth 10% less in real terms than it was a year ago – as long as they get the figure they’ve “anchored” to on paper, they’ll be happy to sell.

It’s not a solution that will make anyone particularly happy – buyers don’t get bargains and sellers don’t get life-changing sums for sitting on a pile of bricks. But it might be the least damaging one.

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