David Miles on house prices

David Miles, prospective member of the Monetary policy committee thinks the housing market is over the worst. Here is his answer to the Treasury Select Committee:

What are your views on the prospects for the UK housing market?

Before house prices started falling I - like many others - believed that prices were over-valued. I said that in 2005 and 2006 (and was ridiculed by many in the mortgage industry for so saying).

The economic modelling I did then suggested prices might be 20-25% too high – relative to sustainable levels. Since then there have been many offsetting developments: Incomes are weaker; unemployment is up sharply, and is expected to rise further. But interest rates are down a lot (and there has been a reasonable amount of pass-through to the cost of mortgages since the significant cuts in Bank
Rate).

High loan-to-value mortgage products have dried up. Ultimately that is not a disaster; people will wait a bit longer to buy and rent a bit longer. The owner occupation rate would be lower, but the rented sector bigger. It does not clearly reduce substantially the long run demand for housing.

The short run issues are more difficult. Now 20-25% deposits are typically required. The flow of first time buyers will be reduced as they accumulate higher deposits. This means that the volume of house purchases on a transition to a new equilibrium, where people buy later and with higher deposits, will be reduced. That is part of what we have been going through over the past 18 months. But it is a transition.
Expectations are crucial in the housing market and they look a bit better now than a few months ago.

My hunch – and I put it no stronger than that – is that we have seen most of the overall aggregate house price falls. But no-one knows.