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As safe as houses? There could be a high price to pay for creating a boom
Over the years that I have been writing for this newspaper no subject has brought forth more reaction from my readers than the housing market.
By contrast to London, in many other regions prices are well down. For example, in the North West and Yorkshire, they are now more than 20pc below their peak, and they have fallen by more than 25pc in the North East. Photo: PA
By Roger Bootle
9:30PM BST 02 Jun 2013
215 Comments
I once acquired a degree of notoriety by pronouncing that the market was substantially over-valued and that prices would ultimately fall by some 20pc. They carried on rising. As you can imagine, I found myself on the receiving end of what I may politely call opprobrium. (You can guess the impolite version.)
Yet it may surprise you to hear that I was right – well, sort of. Some of my less kind critics said that I was right in the wrong country. For property prices fell substantially in Ireland, Spain and the US. (Still, what is a little geographical laxity among friends?)
In fact, although the timing may have been badly wrong, eventually the predictions were not far off even for the UK. From the peak registered in 2007 to their trough in 2009, UK average house prices fell by 17pc. Although they have since recovered a bit, they are still 11pc down from the peak. And that is in nominal terms. In real terms they have fallen more or less continuously since 2007 and are now 28pc below their peak.
But these national averages disguise a huge part of the story. This is a tale of two countries: London and the rest.
In many ways, London has ceased to be British. It is a global city. Only New York is in the same league. At present, for the internationally mobile global elites, London property is perceived as a safe, attractive place to park your wealth – whatever the prices. The result is that prices in the capital are 7pc above the 2007 peak. By contrast, in many other regions prices are well down. For example, in the North West and Yorkshire, they are now more than 20pc below their peak, and they have fallen by more than 25pc in the North East.
Even within the capital, there is a marked divergence between outer London and prime central London. In the former, since the previous peak in early 2008, prices are still down by 2pc, whereas in the latter they are up by almost 30pc.
Interestingly, despite the large price falls outside London, house prices still look stranded in mid-air. The ratio of average house prices to average earnings is at 5.2, down from 6.3 at the peak but well above the historical average of 3.7. It is even still above the peak at the top of the previous boom in the late 1980s.
So what does the future hold?
Prices appear to be gently rising again, but without much support from the economic fundamentals. The UK economy is probably on the up, but not by very much. In any case, I doubt whether average earnings will increase much faster. And it is possible that employment will fall back as the public sector cuts more jobs.
At some stage, interest rates will have to return to normal. Admittedly, I think that is likely to be far distant. Nevertheless, it will come. At that point, unless something else has intervened to make houses more reasonably priced, there is going to be mayhem.
You may think this unduly alarmist. After all, hasn’t the US housing market rebounded strongly? It has. But there is a vital difference. In America, property prices fell so far that the ratio of house prices to earnings actually dropped well below its long-run average. That is precisely what has not happened in the UK. So if a new period of rising prices now gets under way here, this would be from a starting point where property already looks priced at bubble levels.
In the midst of all this, along comes the Government with its latest scheme to boost its popularity – whoops, sorry, re-invigorate the economy. We still don’t know whether the Help to Buy schemes announced in the Budget will make much difference.
After all, of the equity loans and the mortgage guarantee, the latter has by far the bigger potential to boost the market. But how far it is taken up will depend on how much lenders are charged for the Government’s guarantee. And we still don’t know the answer to that. What we can be pretty sure of, though, is that in so far as these schemes do any good it will come by boosting house prices.
Admittedly, the measure’s defenders say that this will aid new building. But if the aim is to elicit a supply response it is difficult to believe that this could not be done more effectively by intervening directly on the supply side, perhaps by taxing undeveloped land or by further easing planning restrictions.
Help to Buy is in the time-honoured British tradition.
For the politicians, the idea of house prices rising over the next couple of years gets the taste buds going. More consumer wealth, more confidence, more transactions and more housing-related economic activity. The fact that this will result in millions of people – often the young strivers the Government supposedly wants to encourage – being shut out of the housing market gets obscured.
This may be the right judgment politically but economically it is a disaster. If I told you that car prices were going to rise by 10pc you would think that was bad news because it would signal that not enough cars were being supplied to meet consumer wants.
But somehow, in the case of houses, this logic gets lost. The malfunctioning housing market, with its combination of copious subsidies to boost demand and umpteen restrictions to constrain supply, is probably the greatest area of failure in British post-war economic policy-making. It is at the root of the sharp booms and busts in the economy and of the perennial tendency for the economy to seek escape from its travails through inflation.
I fear a heavy price will be paid for whatever recovery the Government’s measures may bring in the housing market. If they cannot get property prices into line with earnings then, when interest rates have to go up, there will be a crash in the market which will cause untold misery to many people – and force losses on the taxpayer through ill-judged mortgage guarantees.
We will only get out of this recurring mess when the Government allows market forces a freer hand in the housing market – ending the subsidies to home ownership and easing the restrictions on the supply of building land.
Don’t hold your breath.
Over the years that I have been writing for this newspaper no subject has brought forth more reaction from my readers than the housing market.
By contrast to London, in many other regions prices are well down. For example, in the North West and Yorkshire, they are now more than 20pc below their peak, and they have fallen by more than 25pc in the North East. Photo: PA By Roger Bootle
9:30PM BST 02 Jun 2013
215 Comments I once acquired a degree of notoriety by pronouncing that the market was substantially over-valued and that prices would ultimately fall by some 20pc. They carried on rising. As you can imagine, I found myself on the receiving end of what I may politely call opprobrium. (You can guess the impolite version.)
Yet it may surprise you to hear that I was right – well, sort of. Some of my less kind critics said that I was right in the wrong country. For property prices fell substantially in Ireland, Spain and the US. (Still, what is a little geographical laxity among friends?)
In fact, although the timing may have been badly wrong, eventually the predictions were not far off even for the UK. From the peak registered in 2007 to their trough in 2009, UK average house prices fell by 17pc. Although they have since recovered a bit, they are still 11pc down from the peak. And that is in nominal terms. In real terms they have fallen more or less continuously since 2007 and are now 28pc below their peak.
But these national averages disguise a huge part of the story. This is a tale of two countries: London and the rest.
In many ways, London has ceased to be British. It is a global city. Only New York is in the same league. At present, for the internationally mobile global elites, London property is perceived as a safe, attractive place to park your wealth – whatever the prices. The result is that prices in the capital are 7pc above the 2007 peak. By contrast, in many other regions prices are well down. For example, in the North West and Yorkshire, they are now more than 20pc below their peak, and they have fallen by more than 25pc in the North East.
Even within the capital, there is a marked divergence between outer London and prime central London. In the former, since the previous peak in early 2008, prices are still down by 2pc, whereas in the latter they are up by almost 30pc.
Interestingly, despite the large price falls outside London, house prices still look stranded in mid-air. The ratio of average house prices to average earnings is at 5.2, down from 6.3 at the peak but well above the historical average of 3.7. It is even still above the peak at the top of the previous boom in the late 1980s.
So what does the future hold?
Prices appear to be gently rising again, but without much support from the economic fundamentals. The UK economy is probably on the up, but not by very much. In any case, I doubt whether average earnings will increase much faster. And it is possible that employment will fall back as the public sector cuts more jobs.
At some stage, interest rates will have to return to normal. Admittedly, I think that is likely to be far distant. Nevertheless, it will come. At that point, unless something else has intervened to make houses more reasonably priced, there is going to be mayhem.
You may think this unduly alarmist. After all, hasn’t the US housing market rebounded strongly? It has. But there is a vital difference. In America, property prices fell so far that the ratio of house prices to earnings actually dropped well below its long-run average. That is precisely what has not happened in the UK. So if a new period of rising prices now gets under way here, this would be from a starting point where property already looks priced at bubble levels.
In the midst of all this, along comes the Government with its latest scheme to boost its popularity – whoops, sorry, re-invigorate the economy. We still don’t know whether the Help to Buy schemes announced in the Budget will make much difference.
After all, of the equity loans and the mortgage guarantee, the latter has by far the bigger potential to boost the market. But how far it is taken up will depend on how much lenders are charged for the Government’s guarantee. And we still don’t know the answer to that. What we can be pretty sure of, though, is that in so far as these schemes do any good it will come by boosting house prices.
Admittedly, the measure’s defenders say that this will aid new building. But if the aim is to elicit a supply response it is difficult to believe that this could not be done more effectively by intervening directly on the supply side, perhaps by taxing undeveloped land or by further easing planning restrictions.
Help to Buy is in the time-honoured British tradition.
For the politicians, the idea of house prices rising over the next couple of years gets the taste buds going. More consumer wealth, more confidence, more transactions and more housing-related economic activity. The fact that this will result in millions of people – often the young strivers the Government supposedly wants to encourage – being shut out of the housing market gets obscured.
This may be the right judgment politically but economically it is a disaster. If I told you that car prices were going to rise by 10pc you would think that was bad news because it would signal that not enough cars were being supplied to meet consumer wants.
But somehow, in the case of houses, this logic gets lost. The malfunctioning housing market, with its combination of copious subsidies to boost demand and umpteen restrictions to constrain supply, is probably the greatest area of failure in British post-war economic policy-making. It is at the root of the sharp booms and busts in the economy and of the perennial tendency for the economy to seek escape from its travails through inflation.
I fear a heavy price will be paid for whatever recovery the Government’s measures may bring in the housing market. If they cannot get property prices into line with earnings then, when interest rates have to go up, there will be a crash in the market which will cause untold misery to many people – and force losses on the taxpayer through ill-judged mortgage guarantees.
We will only get out of this recurring mess when the Government allows market forces a freer hand in the housing market – ending the subsidies to home ownership and easing the restrictions on the supply of building land.
Don’t hold your breath.
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