Sunday, February 04, 2018
Why a soggy housing market should concern us all
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

There are large parts of the economy in which it is relatively easy to work out what is going on. The housing market, it is fair to say, is not one of them. Contradictory information abounds, on prices, activity and just about everything else.

Nevertheless, it is also fair to say that, cutting through the undergrowth, we have a picture of a housing market that, if not “broken” – the government’s preferred phrase when talking about something that is on its watch – is certainly badly injured. It is a picture of weak, and probably weakening activity, slowing or stagnant house-price inflation and buyers and sellers who are so conditioned to expecting disappointment that they have given up on the market.

I base that on three pieces of evidence. The first comes with the Bank of England’s figures for mortgage approvals. They dropped by 6% in December to 61,039 and, before you ask, the figures are seasonally adjusted.

Mortgage approvals are a great barometer of housing market activity. In the 10 years leading up to the financial crisis, they averaged 104,000 a month, with monthly peaks of 134,312 in 2003 and 128,915 in 2006, both comfortably more than double the latest figure. They slumped to just 26,684 in the autumn of 2008, subsequently recovered to nearly 75,000 but are now at their lowest for three years.

The latest monthly fall has been attributed by some to the fact that the Bank raised interest rates to 0.5% in November, the first increase in official interest rates for more than 10 years. Did that have the immediate effect of cooling the housing market?

If it did, that would suggest a housing market, and indeed an economy, acutely sensitive to even very small changes in interest rates. I suspect that there was not that much of a direct effect – by the time people apply for a mortgage they have been in the process of house hunting for some time - though I would not rule out the possibility that some of the commentary around the November rate rise, that it was likely to be the first in a sequence, had a dampening effect.

The second bit of evidence is on house prices. You could go quietly mad trying to reconcile the various house price measures, some of which are measuring different things. There are asking price measures, which tend to be the most volatile, and measures of house prices at the mortgage approval stage. One of these, from the Nationwide Building Society, showed what it described as a “surprising” acceleration in house-price inflation from 2.6% to 3.2% last month.

It was indeed surprising. I tend to look at another measure, produced for LSL Property Services by the consultancy Acadata. It uses actual price data at which properties are bought and sold, including cash purchases.

It will provide a January update shortly but for December, and 2017 as a whole, it showed that house prices in England and Wales stagnated, rising by just 0.2% through the year. That, it should be said, reflected considerable price weakness in Greater London, where prices dropped by 4.1%, and a subdued picture for the rest of the south-east, with a rise of just 1%. Without the drag from them, house-price inflation was 3%, though that was still well down on the 7% reached in the first half of 2016.

The evidence on house prices suggests, with some certainty, a slowing of inflation, which few people will begrudge. The big question is whether falling prices in London ripple out to the rest of the country, as has happened in the past. Nationally, with continued very low interest rates (even with a rise or two this year) and limited supply, the scope for meaningful house price falls is limited. Stagnant prices are, however, very likely.

The third element in any assessment of the market is what is happening to activity. Official transaction numbers are flat at around 100,000 a month. But the message from surveyors is a very downbeat one. The Royal Institution of Chartered Surveyors (Rics) will also publish an update soon but its most recent residential market survey showed, along with expectations of modestly falling prices, a gloomy assessment of activity.

It showed the absence of any boost from the chancellor’s abolition of stamp duty for most first-time buyers in the November budget, a drop in agreed sales, and a continued stand-off between weak new buyer enquiries and sales instructions, with the latter negative for the 23rd month in a row. Weak demand and weak supply make for a very soggy market, which is what we have.

There is more to this, however, than a housing market in the doldrums. The recent English Housing Survey showed a housing market that is failing to deliver, for potential home buyers and the economy.

There was a time, not so long ago, when in a previous government ministers contemplated setting a target for home ownership of 80%. The survey showed that in 2003, when home ownership in England reached a peak of 71%, the country was within striking distance of such a target.

Now, however, home ownership in England is down to 63% of all tenures, and it is dominated by older people. Most home owners own their homes outright - 34% of the 63% – something that typically applies only to people who have paid off their mortgage.

Ten years before the period covered by the latest survey, so in 2006-7, 72% of those in the 35-44 age group were owner-occupiers. Now that has dropped to just 52%. The German model of later home ownership is becoming the norm in Britain. The drop in owner-occupation among the 25-34 age group, from 57% to 37%, alongside an increase from 27% to 46% in private renting, is just as stark.

This, as you may have seen from recent coverage, is causing deep concern within government, though it did not prevent Theresa May, in her recent less than successful reshuffle, maintain the revolving door tradition of appointing a new housing minister every time a prime minister reshuffles the ministerial dice. The latest is Dominic Raab, who on past form will be moved to another job by the time he has learned the housing brief.

The politics of this are straightforward; voters for whom the housing market fails to deliver are likely to take their revenge on the government. There were competing explanations for why there was net support for Jeremy Corbyn’s Labour up to and including the 40-49 age group but disappointed housing expectations were high on the list. The government has been keen to reap the benefits of taxing transactions – stamp duty receipts reached a record £9.5bn last year – without considering the consequences for those transactions.

For the economy, a housing market that turns over more slowly, and in which –even after recent small falls – London is far out of reach for people from most other parts of the country, contributing to low geographical mobility, is a serious constraint on efficiency.

This is the time when, after shrugging off the effects of the crisis, housing activity should be powering ahead and returning to some kind of normality. The fact that it is at best flatlining, at worst in a new decline, is worrying.