Sunday, 21 October 2007
UK housing - shock and awe
It is hard not to feel a sense of awe and wonder when you look at a chart depicting UK house price trends. Just look at that rate of growth. The rocket metaphor is the only thing at comes close to describing the acceleration of prices in the last couple of years.
You can try to adjust this price series in any number of ways, but you are always left with the same basic picture. Try deflating the series with the consumer price index, average wages, GDP, or cumulative rainfall, and it still has the same basic shape. From 2000 onwards, the series just shoots off heading towards infinity.
But can house prices continue like this indefinitely? What would it take for the UK to have another ten years of double digit housing growth? Would lower interest rates be enough? Would we need another 15 million migrants to crowd into an already crowded island? Would UK planning laws need to tighten further in order to make it literally impossible to build a new house?
Here is a funny thing - just as house prices are starting to wobble, we are beginning to hear these kinds of stories being pushed out into the media by people who have a vested interest in keeping the bubble going.
Take this story in today's Telegraph. It suggests that the UK's population will swell to 75 million by the middle of the century. It pessimistically concludes that:
"The rapidly growing population will increase demand for housing, putting pressure on green-belt land and shoring up property prices for years to come."
Well, here is an awkward fact. Average fertility of British Women is rather low. In fact,according to the Office of National Statistics, "in 2006 the total fertility rate (TFR) in the UK was 1.84 children per woman." The rate of fertility required to keep the population constant in 2.1. In other words, the UK is likely to face a declining population within a comparatively short period of time. This is due to the fact that the population is getting older and the numbers of fertile women are shrinking.
At this point, there is a tired old rebuttal to this hard and unavoidable fact. What about immigration? What about all those Eastern European plumbers and their families. Won't a tidal wave of Romanian builders and Czech au pairs keep the housing bubble going.
Unfortunately, that won't happen for four reasons. First, the UK is not alone in facing declining fertility - it is happening all over Europe - east and west. Second, the kind of immigration numbers required to keep the UK population growing are unfeasibly large. Third, immigrants are extremely unlikely to have the earnings capacity to buy the multi-million three bedroom Wimbledon Terrace. Finally, even if immigrants did arrive in sufficient numbers and with a big bank accounts, their fertility rates will decline for the same reason that it did for British born women i.e. it is extremely expensive to have children in the UK.
So as the bubble starts to wobble, we will hear a lot more of these "too much demand, not enough supply" stories in the media. However, these half-baked stories, often resting on some barely understood statistical trend, won't save the UK housing market.
This thing is coming down. The landing will be hard. People will be hurt. So-called "housing wealth" will evaporate, and irresponsible banks and building societies will run into trouble. The chart above is about to take a nasty turn south. The only question is whether it will come down as fast as it went up.
You have been warned.