Sunday, May 27, 2007
End of the house price boom is in sight
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

typhouse.jpg

Whenever I write about the housing market I feel a bit like Tom Jones, with his army of underwear-throwing fans. On the one hand it is always good to get a response. On the other, you’re never quite sure what you are going to get.

Anyway, this is a good moment to take another look at housing. Interest rates have risen four times and the message from the Bank of England’s inflation report and last week’s minutes was that they have further to go. Housing slowdowns of varying intensity have hit America, Spain and Ireland, which to some is evidence of global bubble about to burst.

Housing is also in the news as a result of Ruth Kelly’s embarrassing announcement of a delay in the introduction of home information packs (Hips) – they will now be phased in from August 1. There had been fears Hips would bring housing activity to a halt. Now, although the government remains committed, some question whether they will be introduced at all.

So what is happening to Britain’s housing market, and what is going to happen?

When I dropped in at Building Societies Association conference last week, talk of a UK slowdown was high on the agenda. Societies saw an 8% drop in mortgage approvals last month compared with a year earlier, the first such fall since the summer of 2005. Net new advances more than halved between March and April.

These figures chime with other evidence that higher interest rates may be starting to affect the market, though these things take time. The Bank noted that the effective mortgage rate rose by only 0.38 percentage points following the cumulative 0.75point hike in Bank rate between August and January.

This was not due to a sudden outbreak of generosity on the part of lenders but because many borrowers are on fixed rates, on which the average increase was just 0.04 points. The crunch for them will come on remortgaging.

The recent rise in house prices should be put in perspective. Figures from Nationwide building society for the first quarter show a phenomenal annual price rise in Northern Ireland, 57.6%, with Scotland up 15.2% and London 14.3%. But in the Midlands, the north and Wales, house-price inflation has slowed to between 4% and 6%.

Many factors have led to house prices rising, more than trebling in fact, since May 1997. They include rising employment, rising numbers of households, limited new housing supply and the emergence of buy-to-let. As people’s confidence in conventional pensions has declined, so their belief in property has increased.

It is also the case, both in Britain and globally, that the fall in long-term real interest rates – the gap between inflation and interest rates on government bonds – has helped support property.

Much the most important factor, however, has been the short-term interest rate set by the Bank. Here, there is a coherent story about the various phases of the current house-price boom.

The first phase was from the mid1990s to 2000-1. The sharp fall in prices at the end of the 1980s and early 1990s had pushed them to very low levels in relation to rents, other assets and incomes. This, combined with the realisation that lower interest rates were here to stay, produced a strong rise.

By 2000-1, though house prices were still below their long-term trend, the boom had begun to fade. Then, in response to the bursting of the dotcom bubble, September 11 and the start of the Iraq war – all global events – the Bank cut rates, taking them all the way down to 3.5% during 2003. These cuts produced the boom’s second phase, from late 2001 to mid2004.

Then, however, the Bank switched into tightening mode, raising Bank rate five times between November 2003 and August 2004. The results of this on the housing market were significant, producing the famous 2004-5 pause in prices. I’m often characterised as a cockeyed optimist, but I expected that pause to continue.

Why did it not do so? Either the fact that the Bank stopped hiking, or its single rate cut in August 2005, or both, stimulated the market, giving us today’s phase of the boom. The Bank almost brought the housing market down to earth but did not quite follow through, a bit like the allies and their failure to get Saddam Hussein in the first Gulf war.

If I’m right that a housing slowdown is in the air, then what we will see in the coming months is a sharp slowdown in house-price inflation, in direct response to the interest-rate hikes we have seen, and in prospect.

The difference between now and then is that global pressures for the Bank to cut rates are hard to see. The Bank has presided over high house-price inflation in order to meet its target for consumer price inflation. The boot is on the other foot. Because that target is paramount it will not mind, within reason, what happens to house prices to achieve it.

Does that mean a house-price crash? Not in my view. House-price crashes are rare in Britain and have never occurred in the absence of recession. The global economic environment is strong, as is the UK economy. I would see something like the 2004-5 picture of flat or modestly rising prices, but lasting far longer.

Housing-market bears usually argue that such is the overvaluation of housing, 50% on conventional (and I would argue irrelevant) measures like the house-price /earnings ratio, that prices have to fall. However, a new analysis by Lehman Brothers, which has reworked its model of the UK housing market, suggests a more modest overvaluation of 15%.

Several factors have prompted Lehman’s reassessment, including the narrowing spread between official interest rates and mortgage rates, and the credibility gains achieved by Bank independence. The firm has also looked in detail at credit conditions round Britain. Where loan-to-income ratios are high, as in London and southeast England, loan-to-value ratios are typically lower than in the north, indicating that southerners usually have plenty of equity to put into a property purchase.

Lehman’s conclusion, like mine, is that prices will slow going into next year but not collapse. And 15% is much easier to work off, through a period of flat house prices and rising incomes, than 50%.

What could go wrong? Each time the Bank has lifted the veil on interest rates recently it has raised the level at which it expects them to peak. Oil and food prices present the biggest risk to its view that inflation will soon be back to 2% but so, according to the CBI, is the fact that manufacturers’ price expectations are at a 12-year high.

The Bank, with its tougher language, is getting things back under control. House prices have always been most vulnerable when the authorities have lost control of monetary policy.

PS: Last week I did a talk at Chatham House on my China-India book, The Dragon and the Elephant, and a launch at the Institute of Economic Affairs. There is a lot of expertise on the subject out there.

One frequent question was whether the Chinese economy will crash. China’s growth topped 11% in the first quarter and the stock market is enjoying a Klondike boom, prompting crash warnings from Alan Greenspan and the OECD. Nine days ago the authorities raised interest rates, increased reserve requirements and allowed the currency more slack.

The economy is growing too rapidly for comfort and the authorities are concerned by feverish stock-market activity. But 11% growth, while heady, is not too far above China’s 9.5% average of the past three decades. The aim is to apply the brakes gently, not bring things to a juddering halt.

As for the stock market, it is highly unlikely to bring the economy down. The link between stock-market falls and economic activity is pretty tenuous in Britain. In China, where the vast majority of businesses are not quoted, it is even thinner. The stock market may tumble but the economy will merely slow.

Meanwhile, 100 teachers of Mandarin are being recruited from China to teach in English schools. China has invested $3 billion in Blackstone, the private-equity group, as part of a $200 billion plan to diversify its $1,200 billion of currency reserves into higher-yielding assets. We’ll hear a lot more of this.

From The Sunday Times, May 27 2007

Comments

Hi David,

Thought I saw this article in the times as well,....you have gone truly public about the inevitabilty of economic fundamentals after all.

Not that I am celebration mood, after the party there is ofcourse the hangoverand oh boy are we all going to have one whether we had partipated or not.

Chickens come home to roost every time and always. No matter how the dice are rolled certain things in life never change......our perception however tends to be susceptible to wild imaginings and in the case of UK Plc ....delusions of grandeur come to mind. Now how are we going to get rid of this roughly 4 trillion pound collective outstanding liability?

Devalue the pound? join the EURO? or just continue to pretend that we continue to be such a rich nation.

We should have known when a politician states " NO MORE BOOM AND BUST" he means really, you are going to get exactly that and more.......because that is what you have voted for!!!

By and keep up the (good work)!

Best wishes


Arik Schickendantz

Posted by: Arik Schickendantz at May 27, 2007 10:08 PM

Does the end of boom mean bust?

Posted by: Sven Bloor at May 28, 2007 03:38 PM

Would you expand on why you feel that measures such as house price/earnings ratio are irrelevant please? Is it because the size of a cash deposit for property is ignored in this measure? Thanks.

Posted by: Andrew Webb at May 28, 2007 05:11 PM

No to bust, as should be clear from even a cursory reading of the piece.

The house-price earnings ratio came to prominence in an era of mortgage rationing, predominantly single earner couples and, particularly in the latter part of the period, substantially higher interest rates - short and long - than now. As I say, I don't think is relevant to the conditions we have had over a number of years.

Posted by: David Smith at May 28, 2007 05:53 PM

"Does that mean a house-price crash? Not in my view. House-price crashes are rare in Britain and have never occurred in the absence of recession."

You are clearly talking nonsense here. I suggest you read recent economic history as WE DID NOT HAVE A HOUSE PRICE CRASH IN THE EARLY 90'S BECAUSE OF A RECESSION, IT WAS THE OTHER WAY AROUND!!!

The housing market is doomed and we are now in the early stages of a crash. Then we will have the recession.

Posted by: D Smith at May 28, 2007 08:00 PM

Don't know who this D Smith is but I have my suspicions, either an old stalker or a refugee from the houseprice-sad website.

Either way, wrong. The UK entered recession in mid-1990, at which time house prices were still rising. They started to fall after the onset of recession, and really fell sharply from mid-1991 onwards. Data here: http://www.communities.gov.uk/pub/115/Table506_id1156115.xls

Posted by: David Smith at May 28, 2007 11:23 PM

What exactly will cause a house price crash?

Record levels of debt, record bankrupcies and IVA's, higher rates, credit tightening due to falling proffits bought on by the record bankrupcies, massive massive trade deficits?

Why doesn't anyone believe that this period of growth quite simply has been built on cheap money that's now evapourating before our very eyes, leaving just a mound of debt? Economies that make next to nothing (like ours) will not experience China like growth (a county making everything!) for ever and a day, the thought that a recession isn't on the cards after 7 years of debt binge is laughable, after all if it's just the value of our homes that keep our country successful, what happens when the banks no longer agree on that valuation? after all, it is their money they're lending to keep the perception of wealth in check.

We are in uncharted territory here I think, an economy so massively inflated by cheap money over 7 years, surely can not continue to grow in the expectation of bigger corporate profits year on year forever when rates continue upwards and people continuing to borrow against the value of their homes to prop up consumer spending.

It's like the tide coming in where people are camped out way up the sand, it wipes these people out little by little, they'd run for the hills, for only the debt chained to their ankles, which makes them completely immobile.

They could maybe get rid of the debt, by passing it to the greater fool, but sadly, even the greater fool can see the tide coming in.

Posted by: FrozenOut at May 29, 2007 10:14 AM

Very interesting, but I do have a question for you David.
The property market, even if it doesn't crash, is now at or very near the top. And at the same time, there are thousands of buy-to-let landlords sitting on properties whose rental yields are only 3-4% of their market value. So if significant numbers of buy-to-let landlords start thinking that they should take their profit and invest in almost anything other than property, couldn't that spark a cycle of selling that would push prices downwards rather than merely see them flatten out?

Posted by: toopoor at May 29, 2007 04:54 PM

It could, but there's no evidence that buy-to-let investors are about to desert the market. Most of them appear prepared to look through current poor returns. And one thing we do know is that they in the long-run they will make capital gains. Also, in quite a lot of cases buy-to-let is a segment of the market separate from the main owner-occupier market e.g. owner-occupiers don't tend to own student flats.

Posted by: David Smith at May 29, 2007 05:49 PM

the market here as levelled in the last 6 too 7 weeks
indeed people r taking "less" for a quick sale

(remeber n.ireland leads the increases in the uk)
i have just sold my house (on a half acre site) sitting in a small village for a small ransom because of the planning control restrictions.
i am going too sit out of the housing market and see what happens with a nice big bank balance.
i think once the interest rate goes up and as banks r not giving good fixed rate mortgages and people originally with these types of mortgages come up for renewal (has time goes on more people will be going onto tracker mortgages) as well as large debts people have on plastic cards which they never had before, also landlords r not buying property here
as the rent is only half the mortgage value a month(press here full of ads too buy property in north of england has the rent covers mortgage)
the house prices have never went down in n.ireland ever!
but i think they will crash
iraq doesn't look great either what will happen too oil?

Posted by: GRAHAM at May 29, 2007 07:16 PM

I hope Northern Ireland isn't leading the rest of the UK - prices have risen by more than 50% over the past year.

Posted by: David Smith at May 29, 2007 07:26 PM

I started my business career in the property sector and I'm tempted to call the top of the housing market now. If I was an investor in residential property, I would've already started to offload my properties.

House prices in Ireland have started falling (down 10% in parts of Dublin since beginning of year), French house prices are heading south and today we've learnt that house prices in the US of A dropped last quarter for the first time in almost 16 years, as 13 out of 20 cities reported declines in March (report by S&P/Case-Shiller). Get out whilst you still can!

Posted by: Mr N Radson at May 29, 2007 08:37 PM

The problem with trying to assess some of these other markets is the data. There is no reliable national data on French house prices. The Case-Shiller 20 city composite measure did not exist until 4-5 years ago, though the 10-city measure did. The most quoted measure for Ireland, the Permanent-TSB index, showed a rise in Dublin prices in the first quarter, but a small, 0.5% on the quarter, national fall.

As I've said here before, conditions are not the same in all markets and price falls are perfectly possible depending on local conditions. In Spain, for example, there has been a huge amount of supply. But the evidence so far, even in some of these markets, is that huge rises are being followed by modest falls. In the US, for example, despite today's reporting, Case-Shiller was showing a similar modest year-on-year drop a month ago.

Posted by: David Smith at May 29, 2007 09:26 PM

The upper-end of the Dublin property market has been hardest hit over the last six months, with areas like Rathmines, Rathgar and Ranelagh down 12.6%. Lower priced areas like Lucan and Adamstown are down 4.2% over the same period (info from Daft.ie - http://www.daft.ie/report/index.daft).

In response to your claim that there's no evidence that buy-to-let investors are about to desert the market, evidence actually suggests that landlords are coming under mounting pressure - more than five percent of landlords opted to sell properties when their tenants' lease expired in the quarter to April, the highest percentage in two years (RICS).

Tenant demand has remained strong on the whole, but rental growth has failed to keep pace with house price inflation causing gross yields to fall their fastest rate in three years.

In an environment of rising IRs, increasing numbers of landlords are selling.

Posted by: Mr N Radson at May 30, 2007 11:37 AM

I don't set much store by asking price measures, here or in Ireland.

As for RICS and landlords' selling, a two-year high doesn't amount to much, given the very low level of landlords' sales over that period. Landlords' sales were significantly higher, for example, in 2003-4 but that did not signal the end of buy-to-let, rather a pause before renewed growth. I agree that the pressures should be greater this time, but so far there's little evidence of landlords exiting the market to any significant extent.

Posted by: David Smith at May 30, 2007 02:32 PM

Thanks for the reply David - you make some good points.

On the Irish side of things, wherever you look in Ireland - daft or TSB/ESRI - the signs coming through are all the same - a market that is starting to fall. The latest Permanent TSB/ESRI house price index recorded a fall of 0.8% in April, which followed a 0.6% fall in national house prices in March - which was the first fall in five years for the market as a whole.

The housing market warning signs are mounting.

Posted by: Mr N Radson at May 30, 2007 05:54 PM

David

Do you know where I can get a copy of the Lehmans Research article you mentioned in your article on Sunday?

Thanks

Paul

Posted by: Paul at May 31, 2007 12:02 PM

I wonder will the stock market take a turn for the worse as some predict? an if people do start to sell property where can they invest?

Posted by: Tai lam at May 31, 2007 11:20 PM

Tai,
Stocks (basic index tracking funds, cheap on commissions) is the best place for serious investors to go. Diversify a bit with geographies, no more than 25% exposure on UK, rest Europe, US, emerging markets 10-15% of funds. Keep about 20% of total funds in AAA rated bonds, short tenures in these IR growing times.
You have to be able to stay in your investment for 10 years, and do not check the market at all. If you make rebalancing decisions in the period, chances are they will be suboptimal

Posted by: Michele at June 1, 2007 09:58 AM

For one and for all let us stop to blablabla about student population, divorce rate and single households. These urban legends are NOT supported by data of the office of National Statistics. Please check for yourself at:

http://www.statistics.gov.uk/cci/nugget.asp?id=170
http://www.statistics.gov.uk/cci/nugget.asp?id=1356
http://www.statistics.gov.uk/CCI/nugget.asp?ID=9&Pos=6&ColRank=2&Rank=224

The student population is growing at 4.3% p.a., but I ask you... does it have a positive or negative impact on the total housing demand? Well, as a student I was sharing a bedroom in a high-rise, when I started working I moved to a two bedroom flat conversion.... if you know what I mean, more students means LESS housing demand!

Posted by: Michele at June 2, 2007 09:44 AM

With reference to the Lehman paper, called "UK housing market redux", I'll see whether they want to make it generally available.

Michele, I'm afraid your attempt to debunk doesn't work. Divorces may have declined a bit recently but remain at an elevated level compared with the past. As for households, the key statistic is that the number of households rose by 30% between 1971 and 2005. Within this, the fastest-growing component was single-person households.

Posted by: David Smith at June 2, 2007 12:12 PM

But who cares about the 1971 to 2005 increase? Isn't it 2001 to 2005 that is important David. It is the boom of these years that we are constantly told by EAs is down to high divorce rates, immigration and a larger percentage of single households.

If you look at the figures more closely you'll see that a large part of the change happened between 1971 - 1991, with far less of a change between 1991 and 2005.

Posted by: Paul at June 3, 2007 11:53 AM

If you're trying to say that household growth hasn't been strong recently, I'm afraid you are sadly mistaken. The statistical point about divorce is that even a small decline in the rate leaves a high level of divorces. Here are the numbers for recent household growth in England:
http://www.communities.gov.uk/index.asp?id=1002882&PressNoticeID=2272

And here are the projections:
http://www.communities.gov.uk/index.asp?id=1002882&PressNoticeID=2374

Posted by: David Smith at June 3, 2007 01:37 PM

David,
What is unclear from your postings is why you want to project this picture of solid prices, unfaltering housing demand, vanishing supply and so on. And you become so touchy when someone argues otherwise. Is it because you think it is good for the country? for our Economy? For the reputation of the Chancellor? Please enlighten us...
Other people (me included) think that the housing market is a very complex one, and simple anecdotic evidence and superficial analysis stand no chance to forecast trends. People do divorce, but then re-marry. Single households? Actually people are sharing homes in order to step on the housing ladder. Immigrants? Well these are the people who cram the new one bedrooms in the city center of Leeds, that no English family would touch with a very long pole.
However, what is really distinctive of the present housing market is the buy-to-let phenomenon (current version of the Dutch tulip bubble)
"The rental income of many investment properties does not cover the mortgage, but landlords have been happy to make up the shortfall as long as rising property prices will net them a profit when they sell. But once prices start to falter, buy-to-let will become a lot less attractive"
http://news.independent.co.uk/business/analysis_and_features/article2607314.ece
"Possessions lawyer Moore and Blatch, which acts on behalf of mortgage lenders, also says it has dealt with more buy-to-let repossessions in recent months. 'The buy-to-let market may have reached its peak. 'The days of making a quick buck out of buy-to-let are gone,' "... and more nails in the coffin: Tenancy deposit scheme, HMO licensing, Housing health and safety rating system, Tax evasion
http://observer.guardian.co.uk/cash/story/0,,2093997,00.html

Posted by: Michele at June 3, 2007 10:22 PM

Michele,

I am afraid the straws you cling to about BTL being a 'tulip bubble' are nonsense. BTL is not generally in any real danger of making losses. The chancellor has been repeatedly feather bedding tax breaks to BTL, while removing them from ordinary people (MIRAS).

But you are not up to listening to reason.

You dismiss the many millions of immigrants, a policy of mass immigration which by the way, will accelerate much further as the government have left loopholes for 'family immigration' meaning huge numbers in chain migration.

The BOE have been generating inflation as David says - printing lots of new money year on year.

Your future maybe a grim houseshare, if you are lucky, as housing gets even less affordable not more. His plans for 100,000 new homes in eco-towns are, like his tax cuts, headline spin/deceit to placate people. They may be completed in a decade!

Of course, Instead of taking political action you believe in some house price crash nonsense. This belief in a crash is total BS.

Still, believing that everything will work out just right in your favour though some almighty price drop means you don't have to bother making a noise as your country and stake in society is sold out from under you!

Posted by: Mr J Law at June 4, 2007 02:52 AM

Michele,
I hope I don't become touchy, and I slightly resent the suggestion that I've a political interest in house prices always rising. As I've said before, I have no personal or professional stake in rising house prices - a house-price crash would be a better story than a gentle moderation of house-price inflation - and I have never invested in property other than in the roof over my own head. What I've always tried to do is look at the economic arguments and, to be frank, most of the arguments advanced by the crash school are what I would call "if only" economics - imagining a world as they would like it to be rather than as it is. You are the one, I'm afraid, who resorts to strange anecdotes about immigrants and students rather than looking at the hard statistical facts.

Posted by: David Smith at June 4, 2007 08:56 AM

It is these immigrants that will help cause any crash in houses. They are the ones undercutting wages. Mr Joe Bloggs who once could've bought overpriced house now is out of work whilst Mr Immigrant is working for peanuts. Who buys the overprice house now?

Also, lets not forget about Mr BTL who now has a higher mortgage interest burden thanks to hikes in Interest Rates. Sure he can up his rent, but this is inflationary too. Vicious circle effect.

Posted by: Kev M at June 4, 2007 03:30 PM

So it's all Johnny Foreigner's fault? Nonsense.

Posted by: David Smith at June 4, 2007 05:37 PM

More nonsense.
Mass immigration creates massive houseprice rises.

I believe an economist called David Ricardo spelt out the situation, demostrating that indirectly population pressure costs (rising rents and living costs) would prevent investment in real industries and projects which create rising per capita wealth, and would result in a point of stagnation and falling economic wealth.

Posted by: Mr John Law at June 5, 2007 01:33 AM

I'm afraid that is one bit of Ricardo that hasn't lasted well, unlike his law of comparative advantage. Ricardo was drawn to Malthus's ideas about population growth outstripping food supply - it had no relevance to the debate about house prices.

The anti-immigration lobby will dress this up as they will. The mere fact that house prices have risen strongly in countries that haven't had high levels of immigration shows how shallow the argument is. It has been a factor in household growth, but only a factor - as others have pointed out UK household growth was strong during the 1970s and 1980s when we were net exporters of people.

What we have in the UK, it seems, is that immigrants are prepared to work for next to nothing but at the same time they're outbidding the indigenous population for housing. Surely some mistake?

Posted by: David Smith at June 5, 2007 09:55 AM

Why are house prices going up? What is the main driver behind the increase in demand for housing? It can't be immigration because only a tiny proportion of immigrants could ever afford to buy a house in the UK? Is the demand driver BTL, which is now based on the hope/belief that house prices can only move in an upwards direction, rather than yield? If BTL is not to blame what about the commerical banks' lending rules, are they driving demand (It can't be incomes because they're rising much slower than house prices)?

In a seperate market: rents have remained roughly the same, or have even fallen slightly in some parts of the country in the last 3 or 4 years. Has the increase in the supply of rented housing (caused by the surge in BTL) been exactlt balanced by the increased demand for rented housing created by priced out first time buyers and immigrants? If rents are not increasing doesn't this refute the argument that the UK housing boom has been caused by an undersupply of housing? Japan is a densely populated island like Britain. Why did house prices fall there for 15 years on the spin? Was it solely down to a recession, or was there an element of demand that was speculative, that suddenly reversed?

Posted by: Nigel Watson at June 5, 2007 12:29 PM

This is mass immigration, where we need a city the size of birmingham every 5 years - thats a huge city.

Just looking at the numbers recently on the BBC website, nearly 2 million have arrived in the past 2 years. 5 eco-towns arenot going to make any difference.

Those low paid workers have to pay rent to live here, and they share homes, and just like the smaller immigration surges which created the east end of london, the rents from these workers who cram into homes are more profitable than the rent from a couple's wage, which is why prices rocket upwards. 5 new workers sharing a family home paying £50pw each (£250), beat a couple paying £125 pw for the same family home!

I believe Ricardo is important, because his theory of rent, labour productivity and consequent wealth distribution is accepted even 200 years later as valid - that is the landlord captures the additional produce of sharp increases in population, not the population itself.

Posted by: J Law at June 6, 2007 11:53 PM

As far as rents go, 6 low paid workers who share a family home, paying £50 each say, means £250 pw, or £1000pm for a landlord.

A couple bidding for the same home, are going to find it hard to beat that, so thats one reason why Houseprices are over £200k.

A new city the size of Birmingham needed to home and service the population every 5 years gives you some idea of the scale.

Posted by: J Law at June 7, 2007 12:04 AM

If the BBC is saying we've had 2 million immigrants in the past two years, the BBC is badly wrong, so you are basing your assertions on wildly inaccurate numbers. Net migration into the UK is about 185,000 a year.

Posted by: David Smith at June 7, 2007 09:51 AM

Flawed analysis.

Rising house prices have not been created by demographic factors. There is not shortgage of housing in the UK. The proof: rents have not increased. If there really was a shortgage of housing rents would have increased, but they haven't. House prices have been pushed up by speculative demand; BTL investors who believe in David's belief that house prices only move in one direction: up

Posted by: Nigel Watson at June 7, 2007 11:25 AM

Don't know who you're accusing of flawed analysis but if you're suggesting that I'm saying demographic factors have been solely responsible for the rise in house prices, please read the article again. It will also answer your earlier barrage of questions. And don't fall into the trap of becoming obsessed with the contribution of buy-to-let. There's been plenty of non-BTL demand relative to housing supply.

Posted by: David Smith at June 7, 2007 03:48 PM

What weight do you put on the (restrictive?) planning policies as a factor? They can lead to restrictive supply in the face of demand.

I believe the Barker report did hint at planning policy being quite a large factor and one can observe the differentials in price between green belt land / agricultural land vs that which can or does have planning permission. Even in London, planning can add a huge gain.

A report here http://www.demographia.com/dhi-ix2005q3.pdf although not thorough and I sense they have a planning agenda (I've not really looked into the authors) attribute much of the price movement on restrictive planning.

Obviously it is complex as there are heritage, infrastrucutre, community etc. issues with planning but is there an economic case for an easing in planning?

*

cf with Tokyo is misleading, different circumstances. But still at the high end of the peak [1990/1] I believe prices were Yen 20m per Tsubo -- which if I get the currency and area adjustments right were approaching £3000 a sq ft on average. So we are no where near that on average.

BTL is only c. 10% of the market [? I think] so can't explain the whole price movement at all, can it?

Posted by: Ben at June 7, 2007 04:43 PM

In the longer term supply versus household growth is clearly an important factor. Here's a link to the Nickell report, which emphasises planning constraints:
http://www.communities.gov.uk/index.asp?id=1510913

Posted by: David Smith at June 7, 2007 04:46 PM

David, I wasn't criticising you!

The argument made by others that house prices are rising because of demographic reasons, immigration etc is false. If there really was a shortgage of housing in the UK rents would be on the increase, but they're not!

The last time I looked 25% of current mortgage lending was BTL. For new BTL "investors" yields are way below what you could earn risk free from depositing funds in a high interest savings account. These new investors are prepared to subsidise their tennants because they expect to make capital gains because "house prices only go up."

BTL is one of the most important factors pushing up the demand, and the price of housing in the UK. This demand growth is based on an expectation. If interest rates rise and yields fall the bubble could pop. I think that its foolish to deny that there is currently a significant amount of speculative demand within the housing market.

David, do you rember the dot.com bubble. There were plenty of journos just like you that predicted the demise of the high street, and encouraged mug Joe public to buy into shares that could only move in one direction.

History is full of examples of speculative bubbles. In most cases economists at the time denied their existance, only to be proved wrong later. What odds on UK house prices in 7 years time being lower than what they are today?

UK house prices are too far away from fundamentals, especially incomes. A major element of demand is speculative. Its only a matter of time before the bubble bursts. There is no guarantee that inflation, and therefore interest rates will stay low. Inflation in China is rising as are oil prices.

Posted by: Nigel Watson at June 7, 2007 05:14 PM

Teach a parrot the terms 'supply and demand' and you've got an economist!" Thomas Carlyle.

Demand.
1,425,000 migrants in two years?
http://news.bbc.co.uk/1/hi/uk_politics/5274476.stm

Supply?
100,000 in 5 new eco towns by 2016? 168,000 new dwellings per year?
I read that the population of a large city like birmingham is 1m people.

Posted by: J Law at June 7, 2007 05:20 PM

If your figures were correct rents would be rising, but they're not.

Posted by: Nigel Watson at June 7, 2007 05:32 PM

Give enough chimpanzees a typewriter and eventually they'll write a Shakespeare play, or come up with some dodgy figures on the internet. Apart from the fact that there is a big difference between 1.4m and 2m, those numbers are an example of what not to do with statistics, involving double-counting, no distinction between short and long stayers, etc. As I say, stick to Migration Watch, their numbers have a basis in reality.

On another matter, predictions about the impact of the internet haven't been that bad. The mistake investors made was to assume the gains could be captured by certain "new economy" companies. A similar error was made in the railway mania of the 1850s.

Posted by: David Smith at June 7, 2007 05:49 PM

Having just stumbled across this blog, I started to read this article about house prices and was stunned to see the economics editor of the Sunday Times engaging in such snide, emotive literary squabbling. To see condescending phrases such as "afraid you are sadly mistaken", "I'm afraid your attempt to debunk doesn't work" and likening readers to chimpanzees frankly shocked me.

I shall certainly not be using this blog for respectful, polite and helpful debate regarding the economy.

Posted by: Matt at June 8, 2007 10:34 AM

Nigel, I believe rents have risen although not as fast as house prices and RICS suggests rents will continue to increase this year. But do read this NY FED paper as to why the price-to-rent ratio may not be an accurate ratio to use see link here http://www.newyorkfed.org/research/staff_reports/sr218.pdf

quote:

“We correct four common fallacies about the costliness of the housing market. First, the price of a house is not the same as the annual cost of owning, so it does not necessarily follow from rising prices of houses that ownership is becoming more expensive. Second, high price growth is not evidence per se that housing is overvalued. In some local housing markets, house price growth can exceed the national average rate of appreciation for very long periods of time. Third, differences in expected appreciation rates and taxes can lead to considerable variability in the price-torent ratio across markets. Finally, the sensitivity of house prices to changes in fundamentals is higher at times when real, long-term interest rates are already low and in cities where expected price growth is high, so accelerating house price growth and outsized price increases in certain markets are not intrinsically signs of a bubble. For all of the above reasons, conventional metrics for assessing pricing in the housing market such as price-to-rent ratios or price-to-income ratios generally fail to reflect accurately the state of housing costs. To the eyes of analysts employing such measures, housing markets can appear “exuberant,” even when houses are in fact reasonably priced.”

Posted by: Ben at June 8, 2007 10:38 AM

Matt,
I think you must lead a very sheltered life. The reference to chimpanzees was merely a response to another one about parrots. "I'm afraid you are sadly mistaken" is politeness itself.

Posted by: David Smith at June 8, 2007 11:38 AM

By the way - I think its great that David responds to my posts - ok - he rubbished the BBC's data, and selects more flawed, IMO, lower migration figures from Migration Watch (i.e. government) migration data based on international migration surveys, which depend on a random series of interviews at some ports.

But it's a good counter argument - perhaps the BBC data is wrong, through double counting etc... and you are best relying on the ONS data?.

However having travelled on packed flights into the UK, the evidence of my own eyes is that the BBC data is a gross underestimate and old!!

Judging from the sheer volume of posts each with a 'helpful' crash viewpoint or some other mad angle in face of the facts - hardly surprising that sometimes the response is terse!

The more recent posts are on the collapsing affordability as rents and mortgage costs rise on a more or less fixed stock of housing with massive population growth.

I think political capital may soon be made to regulate rents just as water companies are regulated, and remove tax breaks on the rented sector as both the large immigrant and native communities will push for this.

Posted by: j Law at June 9, 2007 02:34 PM

Rents are not rising

There is a glut of rented properties.

Rising UK house prices are a function of

(a) Speculative demand from BTL who continue to buy even though rents don't cover mortgages because..........."house prices always go up"

(b) Reckless lending e.g. 6x income. Who says that low inflation and low interest rates are medium, never mind long term, certainties. Peak oil, Chinese inflation ect etc

If immigration was a factor rents would be increasing, but they are not

Posted by: Nigel Watson at June 10, 2007 08:05 AM

More crash rubbish - Rents have risen, and are rising futher.

Those large tax breaks that BTLers get, that, tax breaks that have been removed from ordinary buyers, atifically lowered rents for a time.

If you don't trust Kate Barker, Steven Nickell etc.. when they say supply is a problem just 'cause you fancy a crash to land a house in your lap even as million of immigrants are pouring in then god help you!!! Have you a brain?

Low interest rates act on prices - through discounting them as capital assets! They simply act to transfer savings - credit into capital investment - that means houses, factories, jobs which expand in supply and return a profit and result in more activity.

The dractically low rates on offer, fueled massive capital 'investments', yes - much higher houseprices - and eventaully supplied over capacity in Spain, America etc...

Certainly a crash in real terms is on the cards in these countries as interest rates, inflation rises and incomes move upward, while houseprices stay behind!

And after a sticky patch when interest rates are normalised, what a boon to ordinary people, the young and the creation of families, as houseprice fall in real terms.

Citizens in these countries will emerge with a much higher standard of real living, lower real rents, and lower living costs, ok - higher inflation, but also higher real incomes - incomes to spend on consumption of goods and services other than 'mad' housing!

From this oversupply meeting demand, a few banks will go under, but working people will have more capital to fund projects like a family going forwards - the future is *MUCH* brighter than the UK for ordinary folk - the folk who actually produce real wealth.

This is not the case in the UK, where ever-rising houseprices are a signal of a severe lack of supply not being met by huge ever expanding demand.

The spiralling debt accumulated is real-world long term inflation, which means much much lower living standards.

Mass immigration, massive and in the millions, is now used to undercut labour costs/ 'Skills shortages' while money is printed by the bucket full, in an increasingly centralised Russia like state, which will only result in slight overall gains in productivity, not outlandish per capita gains from selected immigration.

Millions of extra people over the past few years will pull millions of thier families to the UK (which could spell the end of the welfare state.)

Could we return to the times when a worker in the UK paid enormous rents and housing costs to a property owning wealthy elite of toffs?

Crammed into whatever space he could afford, forgoing consumption to pay huge housing costs, and had no way of upping his wages and standard of living, as he was forever undercut by immigrant labour?

Some variation of the above theme is baked into this situation.

Posted by: J Law at June 10, 2007 03:03 PM

Rents are NOT increasing. In many parts of the country: Manchester, Nottingham, Leeds and the North East rents are falling.

Migration: Your assertion that millions of immigrants flooding into the UK has directly caused rising UK house prices is also factually incorrect, unless that is you read the Daily Mail / Daily Express.

Interest rates and inflation: Both currently low, but your blind belief that they will stay low for the forseeable future is purile and based on what exactly?

Peak oil, bio-fuel / rising food prices and the end of the China effect will see inflation surge unless the Bank acts and gets ahead of the curve PDQ

Posted by: Nigel Watson at June 10, 2007 03:53 PM

I have to laugh - by your yardstick I have been 'factually incorrect' for years even as the real world is changing into a neo-feudal state.

While with your 'factually correct and of course politically correct non 'daily mail' view have been factually wrong for year after year as millions and millions arrive on the demand side....!!

Get that tinfoil hat off and wake up to the real world this year - what chance do you have going forwards in respect to property?

Rising inflation and rising interest rates will see rising property prices as well - thats where the money to run politics now comes from..

Posted by: j Law at June 11, 2007 02:10 PM

Hi David,

I thought it would be very interesting to see if your feelings have changed since the 'black swan' incidents in the summer that have led to the continuing credit crunch.

I particularly wonder whether this is likely to change your assertions regarding the behaviour of the buy to let owners who have entered the market late or via new build flats. I would also be interested on whether you feel the capital gains changes from April will have an impact on your interpretation of the dynamic of the situation.

Posted by: Mike Henley at December 2, 2007 11:08 AM

Hi David, Im currently writting my dissertation on the volatility of house prices and the basic test im trying to use are the:
Price to income ratio, Debt servicing Ratio and the Price to rent ratio...I was wondering if you could give me some advice on what way you would calculate these in the UK, would you use national avarages? regional data or medians??

Any help would be greatly appreciated....

Simon

Posted by: Simon Magee at January 31, 2008 05:13 PM

Certainly national averages and you should not mix means (for house prices) with medians (for example for earnings). There's good data on the Communities website ---- www.communities.gov.uk, the time series section of the ONS site --- www.statistics.gov.uk and on both the Halifax and Nationwide HPI sites.

Posted by: David Smith at January 31, 2008 07:14 PM