Friday, 29 May 2009

It is over

House prices have risen in two out of three months. The property market is carving out a bottom. The crash is over.

Today's Nationwide data is alarming. Prices posted a 1.2 percent increase. With interest rates at historically unprecedented lows, we could quickly see the house prices accelerate uncontrollably.

There is a curious feature about the UK property market that makes this scenario likely. Even at the height of the bubble, sales volumes were surprisingly low. Since the crash began, volumes have fallen further. It won't take much of an uptick in sales volumes to see some very rapid increases in property price indices.

If property prices recover quickly, it will translate into a dramatic increase in demand. The transmission mechanism will be mortgage equity withdrawal. Again, with interest rates at historical lows, any gain in housing equity will lead to a surge in lending. With the Bank of England generating huge amounts of liquidity, and the government desperate to see banks increase lending volumes, all the conditions are in place for a surge in spending.

However, the supply side of the economy isn't ready. Firms have been cutting back inventories, reducing capacity and firing workers. As such, the UK economy could be best described as about to see a huge positive demand shock coupled with a contractionary supply shock.

In other words, the UK is primed for inflation.

8 comments:

Anonymous said...

Big Nope!

Even though N'Wide will deny it, it's just higher-enf junk coming on the market as recession moves up the social scale.

Anonymous said...

Great blog! I'm a regular reader here.

I find it hard to believe that houses in UK are actually going up in price, so I have a question about the methodology being used.

Here in the US we have several methods.

One of them is the median price of houses sold. That's extremely unreliable, because the mix affects the reported pricing.

Let's say, in January three "low" priced houses sold at $200,000. Then your median price is $200,000.

In February, one more expensive house sold, at $500,000. Then the median price will go "up" 150%. Of course it doesn't mean any of the houses got any more expensive, it's just the mix that changed.

The most reliable metric we have is S&P Case-Shiller index, which tracks the *same* houses. It has been showing a relentless decline in prices for a long time now.

Anonymous said...

Thanks for the article, Alice. I have two favourite economists, you and Merryn Somerset Webb. On this one, you two do not agree!

http://www.moneyweek.com/investments/property/why-its-still-not-time-to-buy-property-14784.aspx?utm_source=newsletter&utm_medium=email&utm_campaign=Money%2BMorning

MSW's article is an old recycled article, but relevant nonetheless.

I completley agree with you about Inflation, and am positioned for this.

On housing, during a severe worldwide recession, I'm not sure. Will the UK buck the world housing trend?

I am familiar with Pakistan, which has experienced 25% inflation for the last 2 years. During this time, so I understand, high house prices have actually fallen, according to a friend who lives there.

Could the same happen in the UK?

Charlie B said...

2 words - sucker rally

yellerKat said...

Alice, where's the funding going to come from?

boiling frog said...

" Even at the height of the bubble, sales volumes were surprisingly low. Since the crash began, volumes have fallen further"
Volume has fallen from about 90,000 transactions per month to around 30,000 transactions per month. I think this is a huge decrease creating a thin market. Thin markets tend to be volatile.
We shall see if this bounce is a real spring up or a moribund feline.

Anonymous said...

Here is halifax data: floor in 1995, and it wasn't a consistent path down.

Q2 1989 69,850 peak
Q3 1989 69,659
Q4 1989 68,754
Q1 1990 69,103 spring bounce!
Q2 1990 68,980
Q3 1990 68,823
Q4 1990 68,895
Q1 1991 68,932 spring bounce!
Q2 1991 68,575
Q3 1991 67,807
Q4 1991 67,250
Q1 1992 65,882
Q2 1992 64,505
Q3 1992 63,926
Q4 1992 61,643
Q1 1993 61,662 spring bounce!
Q2 1993 62,321
Q3 1993 62,588
Q4 1993 62,868
Q1 1994 63,232 spring bounce!
Q2 1994 62,697
Q3 1994 62,636
Q4 1994 62,383
Q1 1995 62,340
Q2 1995 61,564
Q3 1995 61,115
Q4 1995 61,544
Q1 1996 62,453 spring bounce!
Q2 1996 63,880
Q3 1996 64,519
Q4 1996 66,094

Anonymous said...

here is halifax data re spring bounce in last housing crash: the floor was in 1995, and it wasn't a consistent path down, due to regular spring bounces!

Q2 1989 69,850 peak
Q3 1989 69,659
Q4 1989 68,754
Q1 1990 69,103 spring bounce!
Q2 1990 68,980
Q3 1990 68,823
Q4 1990 68,895
Q1 1991 68,932 spring bounce!
Q2 1991 68,575
Q3 1991 67,807
Q4 1991 67,250
Q1 1992 65,882
Q2 1992 64,505
Q3 1992 63,926
Q4 1992 61,643
Q1 1993 61,662 spring bounce!
Q2 1993 62,321
Q3 1993 62,588
Q4 1993 62,868
Q1 1994 63,232 spring bounce!
Q2 1994 62,697
Q3 1994 62,636
Q4 1994 62,383
Q1 1995 62,340
Q2 1995 61,564
Q3 1995 61,115
Q4 1995 61,544
Q1 1996 62,453 spring bounce!
Q2 1996 63,880
Q3 1996 64,519
Q4 1996 66,094