Sunday, September 26, 2010
Housing market to remain becalmed
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular Sunday Times piece is available to subscribers on This is an excerpt.

Most conversations about the housing market are dominated by prices. On this, the broad picture on the Nationwide building society measure was that prices began to fall in the autumn of 2007 when the mortgage famine hit, dropped by nearly 20% over the next 18 months but began to rise again in the early spring of 2009.

By this summer, prices were nearly 12% above their lows. They have since slipped and are currentlyabout 11% below their pre-crisis peak nationally. In some areas, notably parts of London and the south-east, prices have risen above pre-crisis levels.

That does not sound like much of a housing recession but prices, of which more in a moment, do not tell anything like the full story. For the housing sector, volumes are much more important.

The British Bankersí Association said last week that mortgage approvals for house purchase last month were just 31,767. This was the weakest monthly figure since April 2009 but, perhaps more significantly, only half the typical level prevailing before the summer of 2007. Augustís approvals were only 40% of their recent peak, in November 2006.

Other measures of volumes tell a similar story. Acadametrics, which produces a house price index for LSL Property Services, says transactions (with and without mortgages) totalled 60,600 last month, half the 120,000-plus monthly figure typical in 2006 and 2007. Transactions were 59% of their long-run August average.

A similar picture is provided by Her Majestyís Revenue and Customs (HMRC), which records all property sales above £40,000. Compared with nearly 1.7m transactions in 2006, it will be a struggle to get much above 2009ís depressed level of 848,000 this year.

This weakness is partly explained by a reluctance to buy. The rise in unemployment in the recession was much less than feared but it happened, and fears about the impact of the governmentís spending cuts are holding back some people.

By far the biggest effect, however, is on the supply side, and in particular mortgage supply. This is what drove the housing market into recession and is preventing its recovery.

Michael Coogan, director-general of the Council of Mortgage Lenders (CML), recounted last week that when the CML came to put together its annual list of top 30 mortgage lenders in Britain, it struggled.

Just three lenders, Lloyds, Santander and Nationwide, accounted for more than half the market last year. Add Royal Bank of Scotland, Barclays and HSBC and you have more than 90% of the mortgage market. Some household names, such as Standard Life and ING Direct, lent amounts last year that were barely statistically significant.

Cooganís worry is that any benefit to lenders from the thawing of mortgage funding markets and improved savings flows into banks and building societies, will be more than offset by new tougher rules from the Financial Services Authority on regulating the mortgage market.

The CML fears that net mortgage lending this year, a mere £10 billion compared with £100 billion in 2007, could turn negative in 2011.

Does it matter? Yes. When it comes to mortgages, this situation is discriminating hugely in favour of first-time buyers who have parental funds to draw on. Existing home-owners in safe jobs and with plenty of equity win out versus the self-employed. The housing market has always been unfair but it is becoming more so.

More generally, a low-volume, near-moribund housing market is bad for the economy. It does not just affect estate agents and housebuilders. Even when the housing market turnover was much higher, Britain did not have enough geographical mobility of labour; peopleís willingness and ability to move between regions in search of work. In an era where the housing stock will turn over just once every 25 years, mobility will sink further.

Would not a good, market-clearing slump in prices provide the basis for a sustained recovery in housing activity? George Buckley of Deutsche Bank, in a detailed paper, UK Housing: A Long Run View, runs through just about every measure of house price under or over-valuation. He concludes that while some measures point to a clear overvaluation, many others do not.

House prices are broadly in line with their long-run real trend, and are close to fair value against other assets such as shares and gold. If we assume that there is a gradual upward trend in the ratio of house prices to incomes, again the picture is one where there is no significant under or overvaluation.

Most people in this debate get no further than the crude ratio of house prices to earnings which, as I have pointed out on many occasions, tells us very little.

In any case, a fall in prices now would make the housing marketís problem - a lack of mortgage finance - even worse. The lenders would get even more nervous about lending, and the regulators and ratings agencies would breathe down their necks even harder. First-time buyers prayed for a fall in prices in 2007, only to see that the result was that they could no longer obtain the mortgages to take advantage of them.

So the prospect is of a housing market that remains in the doldrums, perhaps for years, never approaching the volumes that were the norm in the long run-up to the financial crisis. An over-exuberant housing market had damaging consequences for the economy then. A stagnant market will be equally damaging now.