Sunday, February 24, 2019
Housing is creaking - and not just because of Brexit
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.

Every month these days a little battle is played out. Downbeat data is released on the housing market, to be immediately followed by comments from estate agents and others in the property industry. Their general take can be summed up in the opening lines from that song in the musical Annie: “The sun’ll come out tomorrow, bet your bottom dollar that tomorrow, there’ll be sun!”

I do not begrudge them for trying to look on the bright side. If you are in a business which relies on housing turnover going up, and benefits from rising house prices, this is a testing time. The housing market has, in some key respects, never got over the global financial crisis of a decade ago – transactions remain well below pre-crisis levels – and it is suffering a renewed downturn now.

Annual house price inflation has, according to the Nationwide building society, petered out almost completely. Prices last month were just 0.1% up on a year earlier, having come down from more normal 5%-6% growth three years ago.

The Halifax reported a rather alarming 2.9% slump in prices last month, bringing strong echoes of the crisis years, though it reported almost as big a rise in December. It too thinks annual house-price inflation has all but petered out. Asking prices, to take another measure, have had their weakest year for a decade.

I know, at this point, what some people will be thinking, that house prices are too high and any softening, to the point where they are now rising by a few percentage points less than wages, has to be a good thing.

But there is good and bad house weakness. Good house price weakness is when extra homes tilt the balance and make houses more affordable. Bad house price weakness is a reflection purely and simply of weak demand.

It is the bad version that we are seeing at the moment. According to Rics, the Royal Institution of Chartered Surveyors, new buyer enquiries for home purchases have weakened for the sixth month in a row and are now at their weakest since the crisis. It is become commonplace to see this as a problem mainly affecting London and the south-east but it is now widespread; the weakest readings in the latest survey were the east and west midlands.

If prices were determined by demand alone, they would be even weaker than now. But, in the market for existing homes, as opposed to new build properties, supply is also very weak. The Rics survey reports that, apart from a brief downward spike immediately after the referendum in 2016, instructions to sell are also at their lowest since the crisis.

The supply pipeline is also weak according to surveyors, with surveys and appraisals lower than they were a year ago. Potential sellers do not want to sell into a soggy market. If they can do so they would prefer to stay put. High transaction costs, notably stamp duty, are a powerful disincentive to move.

It is tempting to blame most of this on Brexit. Consumer confidence is down and so is the willingness of households to commit to major purchases. That is reflected in a weak market for new cars and, in the absence of Help to Buy incentives, people’s appetite to take the plunge in the market for existing homes.

There is a strong element of the Brexit argument in the Rics survey. It is widely blamed by surveyors for the current malaise in the market. There is also a strong sense that, once it goes away, things will be better. So the outlook for the next three months on sales, prices and new instructions are all dire but those looking 12 months ahead are better. Though I think they are being optimistic about Brexit going away in 12 months - it will be with us for many years - I take their point.

The housing market malaise is not, of course, all or even mainly because of Brexit, though it is to blame for the current uncertainty. There are two other big elephants in the room. The first is affordability. Official figures show that the average house price in England and Wales is 7.8 times annual full-time average earnings. The ratio has continued to climb in recent years, even since the crisis.
Over the past 20 years it has more than doubled in England - up 123% - and nearly done so in Wales; up 92%. Viewers in Scotland have their own figures but they have also gone up substantially.

It is true, of course, that ultra low interest rates affect the affordability calculation when it comes to monthly mortgage payments, making bigger mortgages more affordable. But high prices are still a mountain to climb when it comes to deposits.

And, even though wage growth has picked up, at a little over 3% it is not making much of a dent in high house price-earnings ratio. Older readers will remember a time when you took out a mortgage you could barely afford, confident in the knowledge that salary rises would come to the rescue. Things are different now.

The other elephant is the Help to Buy scheme, beloved of my friends in the housebuilding industry, where it has been like manna from heaven. First-time buyers have been steered towards new housing by Help to Buy equity loans on up to 20% of a property’s value in most of the country and up to 40% in London..

This has had two effects, neither of them healthy. By tilting first-time buyers towards new-build homes it has distorted patterns in the existing homes market.
Young people who used to buy older homes, including “doer-uppers”, now have a powerful incentive to buy new properties. Normal housing market chains are not having a chance to form.

The second effect has been to push up prices for new properties relative to existing homes. Again this comes out clearly from the affordability data. In the early 2010s the house price-earnings ratios for new and existing homes were similar. Since then, however, they have diverged significantly. The latest figures are that the ratio for new homes is 9.7 - the average new home costs nearly 10 times average earnings - compared with 7.6 for existing homes. First-time buyers are being pulled into higher-priced homes and, ultimately, more debt.

Brexit, then, is a problem for the housing market as it is for the economy. But there are other big problems, of affordability and of the need to wean us off Help to Buy. Fixing the housing market will take a very long time.