Monday, 14 May 2007

The fearless UK homebuyer keeps on buying.

Today, the government released the latest house price inflation data from March. Here are the opening three sentences of the press release he is more:

The mix-adjusted average house price in the UK in March 2007 stood at £206,890, up from £204,556 in February 2007 (not seasonally adjusted). UK annual house price inflation in March 2007 was 10.9 per cent, down from 11.8 per cent in February 2007. Annual house price inflation in London was 13.9 per cent in March, down from 16.1 per cent in February. The UK annual house price inflation rate for the 3 months to March was 11.2 per cent and 14.3 per cent in London.

Let us repeat these staggering numbers. In just one month, in just 31 days, the average house price increased by over £2,331. Every day during March, house prices increased by £75. That amounts to a monthly increase of 1.14 percent. Nationally, house prices are up almost 11 percent over the last 12 months. In London, prices are rocketing ahead of the rate of almost 14%.

Am I the only one that finds these growth rate absolutely mad? How can a sane person go into a real estate office and buy a house today? Is there any fear left in the UK? Does anyone ever worry that UK house prices are now completely decoupled from incomes? Take a look of any housing affordability indicator and it will tell you just one thing - house prices are massively overvalued. However, no one in the UK seems to care very much.

Whenever I point these issues out, people respond with one word - supply. They tell me that housing supply in the UK remains very tight. Typically, this one word answer is followed up with a well worn list of reasons why there is such little available housing in the UK; building regulations, rising population, more immigration, more single parent families, no one is building houses anymore, no more land, more people living alone, no more council housing, the list goes on.

However, here is the strangest thing. There's plenty the houses available for rent. In fact, in most of the country, rental incomes are significantly lower than mortgage costs. When I point this out, people typically respond by saying this differential is always made up through house price appreciation.

Here we come to the reason why I won't buy a property. I just don't understand how rents are so low relative to house prices. The rental market shows little obvious sign of a lack of supply; rents are cheaper than mortgage costs. However, I am asked to believe that in the long run this doesn't matter because housing values keep appreciating. Why do they appreciate? Because there is a lack of supply. It doesn't make sense.

So, no house purchase for me thank you very much. Financially speaking, I feel a lot safer renting.


Anonymous said...

"Am I the only one that finds these growth rate absolutely mad?"

No. But obviously you're the only one in the U.K.

"Whenever I point these issues out, people respond with one word - supply."

I have another word: Russians. Or more generally: rich immigrants.

The bubble must suck for the younger generation(s), but for those ready to cash out and buy in Limousin, it has to be a dream come true.

Ben said...

Hmm. There's a word for this sort of behaviour.

Of course, a handful of Russian oligarchs and rich immigrants have virtually no impact on the UK housing market. What goes on in the >$10M house price bracket is (and always has been) completely detached from reality anyway.

Even people who've owned their own homes for 20 years are still reliant on a "bigger fool" arriving to take that $600K 4-bed house off their hands; otherwise, they are just sitting on an imaginary profit...

BTW, some related news from my part of the world. My rent in Edinburgh was cheap three years ago and it hasn't budged one penny. No housing supply shortage from where I'm standing - there are rental properties standing empty and tenants are calling the shots.

shtove said...

And the argument about planning restrictions is pretty much the same as 10 or 20 years ago. Probably the one significant difference is legal immigration - but it won't take much for the Poles to go home and dilute the rental market even more. Still,there are plenty of -arians (Hung and Bulg) to take their place.

Anonymous said...

"Of course, a handful of Russian oligarchs and rich immigrants have virtually no impact on the UK housing market."

Well, this report says otherwise.

Key quote:

"2004 figures show net migration of British citizens away from London stood at -116,200 but the city continues to grow faster than any other area of the UK with immigration rates ensuring London’s net population increase of 1.61% annually."

I would say it's not just rich immigrants buying into the market, but also the money they invest (launder) through companies in 'The City' boosting the salaries of financial types immensely, contributing indirectly to the mad scramble for property.

Ben said...

Don't be silly. London is not gaining 100,000 millionaire foreign businessmen per year.

The vast majority of the immigration to London - indeed to the whole of the UK - is not-very-well-off people from not-very-well-off European countries. They mostly do low-paid jobs and live in the cheapest rented accommodation they can find. And in a few years, most of them will be gone again.

Population growth is not the problem. And the demographic shifts cited by some (e.g. increased divorce rates) are more than compensated for by the increase in people in their twenties living at home with their parent(s), and an increase in the popularity of house-shares.

Massive global liquidity surplus? Check. Speculative investment and bubble-think? You bet. Blame it on the migrants? Think again.