The house price rally has most definitely run out of steam.
Nationwide building society reported this morning that prices fell by 0.5% during July. Annual price inflation fell from 8.7% in June to 6.6%. Apparently the average house in Britain will now set you back a mere £169,347.
The Land Registry disagrees slightly. It reckons prices were sitting at around £166,072 in June. But let’s not quibble over a few grand.
This is roughly where prices were sitting in mid-2006.
And there’s been a barrage of data pointing to further falls in the coming months.
So are we heading for a second crash?
The house price rally is over
House prices seem to have hit a turning point. Take a look at the chart below, which my colleague David Stevenson has just put together on Bloomberg. It shows Nationwide’s monthly change in house prices (white line) and the 12-month moving average (red line).
This helps to cut out some of the monthly noise – it’s a pretty volatile index in the short term. You can see that the average has rolled over quite clearly for the first time since the 2007/08 crash.
Now it’s not as though the moving average has never rolled over in the past without leading to a calamitous downturn. But it does show that the big rally off the 2009 bottom has lost all momentum.
And Nationwide’s report is hardly the first piece of data this week to point to further falls.
On Monday, a survey from property analyst Hometrack showed that prices fell by 0.1% in July. That was the first fall in 15 months. Meanwhile, online estate agent Rightmove reported a fall in the number of people who expect prices to be higher in 12 months’ time – although the figure still stands at 40%, down from 50%, so it’s hardly a massive swing to the ‘bear’ camp.
What’s the problem? The number of buyers is still being restricted by tight lending conditions. As Martin Gahbauer, Nationwide’s chief economist points out, “despite the introduction of a second stamp duty holiday for the vast majority of first-time buyers and record low rates, the number of properties changing hands across the UK is still running at only half the levels seen prior to the financial crisis and recession.”
The latest data from the Bank of England confirms his point. Mortgage approvals fell from 49,500 to 47,600 in June. That’s the lowest level seen in four months, and well below the six-month average of just over 50,000. Bear in mind that before the crash, home loan approvals were consistently running at well over 100,000 a month.
Why is the number of properties for sale on the rise?
On the other side of the equation, the supply of properties for sale is rising again. The scrapping of Home Information Packs has clearly had some effect. It may have been the catalyst that some people needed to start their own property search. They’re not forced sellers of course. But once you make a concrete decision to at least consider moving, the process can take on its own momentum.
But more important is the recent recovery in prices itself. Having seen prices return to near-peak levels, many people have no doubt decided that now might be a good time to sell. Some point to the unravelling of the “unwilling landlord” phenomenon. This is where a homeowner moves house, but keeps their old property to rent out, because they can’t sell easily.
I don’t know about you, but I find it hard to believe that this has had a big impact on the market. Given that bank lending is tight, where do these “unwilling landlords” get the money to move house? Raising a decent-sized deposit without selling your original property isn’t easy for most people, I’d imagine. And it’s not something you can find specific figures for in the official surveys. If you have a theory on this front, do feel free to share it and any anecdotal evidence in the comments section on the website.
What will it take to get house prices back to fair value?
Whatever the precise reasons, supply is up and demand is down. So what happens now? Well, it’s clear that UK property is still over-priced, as we’ve discussed several times in the past. What isn’t clear, is what it will take to get it back to fair value. Both PricewaterhouseCoopers and the National Institute of Economic and Social Research (NIESR) have argued in the past couple of weeks that prices will take several years to return to peak levels in “real” terms. In other words, we won’t see a huge slide in nominal prices, just a slow, grinding devaluation.
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But I’m not convinced that we’ll be taking the slow, scenic route to fair value. The housing market is being propped up by quite remarkably low Bank of England rates right now. Yet Mervyn King, the bank governor, has admitted that inflation will remain a lot higher than target for some time. That doesn’t mean he’ll hike rates any time soon. But it’s going to be a lot tougher to keep the bank rate at the current 0.5% if British inflation climbs much higher.
You can throw in other significant problems, such as black holes in bank funding, and the potential for sharply higher unemployment as the government cuts back on public spending. But what it really adds up to is this. Houses are an overvalued asset, dependent on a very precarious set of economic circumstances. There’s not much of a margin of safety there in case of nasty surprises.
We’ll be getting our roundtable experts in to discuss the topic again soon. I suspect it’ll be an even livelier debate than normal. Meanwhile, if you are planning to buy a house, the main takeaway is that you have to play it safe. Be very sure that you can afford your monthly payments even if rates were to rise. And it’s a good idea to have as big a deposit as you can manage (although you’ll probably need one in any case to get a loan in the first place).
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