Thursday, 4 June 2009

House prices are on the turn

For about three months, I have had this stomach churning sense that house prices might be turning. The crash could be over, and we might be on the verge of a renewed housing bubble. Today's house price data confirmed my worst fears. In May, prices increased by 2.6 percent.

We are about to learn the full meaning of moral hazard. If the current financial crisis has taught us anything, it is that the UK government will do anything to prevent house prices from falling. If prices begin to wobble, it will cut interest rates to zero; it will prevent insolvent banks from going bankrupt, and it will provide limitless guarantees for mortgage lending.

Brown, with the connivance of the Bank of England, created the basis for a pernicious but credible belief, that house prices are a one way bet. If they go up, homeowners get rich; if they fall, the government will sort the problem out. In short, the state is prepared to guarantee house prices.

So what happens next? Unless there is a sudden reversal of monetary policy, we are on the verge of the mother of all housing bubbles. Policy interest rates are negative; banks are being pressurized to lend by the government, and house prices have turned. In addition, there is that now well estabilished belief that the government will do anything to stop prices from falling.

The dangers of a renewed housing bubble are obvious. The Bank of England should begin to raise rates right now. It should anticipate the forthcoming surge in housing related lending. But somehow, I think the MPC will delay, and try to ride short run political benefits of the uptick in house prices.

Thus, it would appear that we never learn. We keep making the same tedious mistake, allowing the housing market to sit at the centre of economic policy making.

17 comments:

AntiCitizenOne said...

Pound to slide, inflation to rise.
Wages to fall.

Anonymous said...

Alice - love ya, but house prices on the turn?

Maybe not so much.

(clue: check the derivatives market not the b/s 'surveys'.

Anonymous said...

Of course, there's a risk you're right. The MPC could be creating a repeat bubble with all the liquidity it has forced into the economy.

But I suspect the recent upturn in prices has other explanations. Transaction volumes collapsed during the end of last year, a small rebound started at the end of the first quarter as people who'd been waiting to buy took the plunge. The mix of properties being sold shifted slightly towards the top end. Seasonal factors may have played their parts. And the simple fact that no market ever traces a straight line to where it's going. If you look at a chart of Japanese property prices from the peak in 1990 it shows a big drop, a flattening (and slight uptick) after about a year, lasting a couple of quarters, and then a long steady decline.

Cheer up. On average, UK real estate is still unaffordable, even if deals are being done at the margin.

electro-kevin said...

Don't forget to add the wrecking of private sector pensions into the mix. People will look to housing as their future more now than ever.

In all honesty I don't know what to do. Sit with my hatches firmly battened ? Or do I break cover now.

Ajay was remarkably prescient, or so it seems.

Phill Tomlinson said...

The next bubble won't be in houses - thats certain. Its in government bonds. Once this pops then we will have a real crisis - not that walk in the park one we have last autumn. Then we will have the mother of commodity bubbles. Houses will get a bit of upturn from that but when a loaf of bread costs a days wage - there won't be much money to spare for mortgage payments!

Proping up zombie banks and printing money won't help houses. It does the exact opposite.

Anonymous said...

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Ludwig von Mises

Stevie b. said...

forget houses - buy farmland

idle said...

Don't think so. All that has happened has been an uptick lasting longer than 6 weeks, during the time it was most likely to happen - late spring, which coincided with the end of the stockmarket panic and the consequent bear market rally on massive short covering.

Downtrend for another two years at least.

electro-kevin said...

Thanks, Idle. How could I have thought otherwise !

Liam said...

Alice, this is exactly what the vested interests want us to believe, and they have been campaigning long and hard.

The UK's finances are in an extremely precarious position. Only a return to strong growth can save us. Personally I don't see this happening. Anyone borrowing a large sum now will be in for a repayment shock within the next 2 years.

Balancing the risks of a) being 'priced out' by another bubble and b) being mortgaged up to the hilt over the next couple of years, and I don't think I will be following your lead to buy a £250k shoe box in London.

Markbaldy said...

Only the brave or the stupid will buy houses now.
Estate agents would like us to think that the market has bottomed out, but affordability has not been considered - it's all hype... again !
When you consider that wages are dropping and unemployment is still rising and the average house price is still well over 5 times earnings, then house price rises make no sense.
Maybe buyers getting property at auction for 40% of market value will be OK, but estate agent prices are still way too high.
We will see what happens when interest rates go up... which they will at some point.
Maybe when Brown goes, then we will see a period of reality setting in - after all, his economy was based entirely on borrowed money riding the back of house price inflation... yet there are still those that think he was a good chancellor - idiots !

Anonymous said...

Have faith Alice.

Just look at the rising yields on guilts...

carol said...

Alice, you should look at http://www.moneyweek.com/investments/property/what-we-can-learn-from-the-last-housing-crash-14794.aspx

I really think we're in a dead cat bounce. Sellers are cutting prices by £5 - 10 - 15,000 here where I live in Derbyshire.

London estate agent said...

Dead cat bounce; I don't think so. Buyer interest is picking up. No doubt about that.

It doesn't add up... said...

Estate agents only experience a couple of property market cycles in a career, if they last that long. As someone who has traded markets with much shorter cycles, I can say that the present market has all the hallmarks of a dead cat bounce.

It's when some profit taking by shorts spills over into a temporary increase in prices (and yes, that means there are some buyers where previously there were almost none). Once the profit taking is over (especially if there's no reasonable profit to be made), buying interest evaporates fast, and prices plunge anew.

formertory said...

Anon @ 4 June 18.24hr:

von Mises's statement was incomplete. The 2009 version should read:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved (but that'll be on some other bastard's watch, not mine)"

boiling frog said...

Since I own my house, I would like to agree with you. But the market is thin. I see a few STRs on HPC are buying, but for the sake of family life rather maximising the financial benefits. They have after all, got an upside of over 20pct, and the income from savings is disgusting, certainly not paying the rent. These are the people that are causing the uptick, not first time buyers a sine qua non for a true resumption of the property bull market.