August is generally a quiet month in the housing market. Hordes of would-be house buyers are either away on holiday or too hot (or too wet this year) to be bothered with house-hunting. But this August, the 0.6% fall in the Halifax property-price index – the “sharpest fall since December 2000”, noted David Budworth in The Sunday Times – seemed extreme even for the summer. Perhaps there is more than just seasonality at work this year? Not according to Lee Watts, managing director of Kinleigh Folkard and Hayward. He has circulated an article headed “Property bubble is not bursting”, in which he argues that “the London market is the most balanced I have ever experienced” and claims “the market will pick up again during the autumn months”. He’s an estate agent, so he would say that, but is he right?
Probably not. A balanced market needs an equal number of buyers and sellers, and today, buyers are decidedly thin on the ground. Bank of England figures show mortgage approvals in July marked their steepest monthly drop since 1990 and are now down a whopping 37% since last year. First-time buyers, who normally account for half of all market activity, have been priced out for some time. But today, they’re an endangered species. A recent survey by the Council of Mortgage Lenders revealed that only 37% of the under-25s even aspire to own a home in the next two years. In 1983, that number was 75%.
Then there are buy-to-let buyers. The London Property News claims that all is well in the buy-to-let sector and that “in the year until July 2004, [London] landlords enjoyed an average return of almost 25%”. If that’s the case, no one’s told investors, who appear to be alarmed by the fact that the five interest-rate rises since November have added a third to the monthly cost of a variable-rate mortgage. And it’s not just new buyers who are losing interest. As the FT notes, “some existing landlords are pulling out of their investments altogether”. The number of landlords opting to sell when tenancies come up for renewal has risen by a third.
That doesn’t sound good to me. So what next? Most “experts” are with George Buckley, an economist at Deutsche Bank, on this one. “It looks likely that house-price growth will be lower than earnings growth for many years,” he told The Sunday Times. Why? Because, for a crash to happen, we’d need a recession and an interest-rate rise of at least 3%. That won’t happen, so “the gap between house prices and earnings will close without the need for house prices to fall”. This sounds reasonable, but it’s not. It’s not the number of percentage points that rates rise that matters, so much as the magnitude of that rise. So far, rates, and thus borrowing costs, have risen by 36% since November. If rates peak at 6%, level borrowing costs will have risen more than 70%. And as Jim Pickard points out in the FT, “the house-price crash that began in 1989 preceded the spike in unemployment [which] in May 1990 was at 6.8%, its lowest for a decade”. There was no recession when house prices started to fall.
Nonetheless, most journalists still say that fears of a crash are “overblown”. A gentle slowdown, they say, is more likely. Graham Norwood, writing in The Observer, is so confident that, although admitting “price reductions are appearing”, he simultaneously exhorts readers to “strike now, as prices fall”. I’d call that hasty advice. The last housing downturn lasted seven years.
Personally, I wouldn’t touch property with a bargepole. House prices are at a higher multiple of earnings compared to previous peaks too (6.5 times on Halifax’s numbers against a long-term average of around 3.5 times) and hence the debt burden, which is what these numbers are really about, is just months away from record high levels, despite low rates. So my answer to the ‘crash or slowdown’ question would be crash and probably soon: early warning signs have already appeared.