"The case for thinking that the housing market is about to turn does now look immeasurably stronger than at any point in the past five years"
Saturday 19 August 1995
One of the ironies of the current malaise in the housing market is that it is in part at least the result of the Treasury's long-running attempts to eliminate some of the worst distortions in the housing market, such as mortgage interest tax relief.
For a few years, and particularly during Nigel Lawson's time at number 11, this new orthodoxy began to command a sympathetic hearing from government ministers. It was an eminently praiseworthy attempt to depoliticise a market that affects the welfare and the wallets of a large part of the British voting population.
The savings on mortgage interest relief since its peak have alone financed at least 2p off the basic rate of income tax. The effect, however, has undoubtedly been to accentuate the decline in house prices in the current downwave of the cycle, just as the tax distortions accentuated the frothy rise in the late 1980s.
It will be a big surprise, alas, if at some point in the next two years we are not treated to some new raft of tax incentives from a Chancellor desperate to win the next election for the Conservatives. (If they do not occur, then you can safely draw the inference that the Tories have bowed to the argument that a period in Opposition, to recharge their deadened batteries, is now necessary).
With that caveat about housing as an investment firmly in place, however, it has to be said that the case for thinking that the market is about to turn does now look immeasurably stronger than at any point in the past five years.
The traditional measures for assessing house price affordability have been looking attractive for some time now. In proportion to income, for example, the cost of house purchase in a low interest rate environment is at a historically low level. Finance too is cheap and more readily available than at any point since the great bubble of the late 1980s.
The banks in particular are flush with cash and falling over themselves to lend money. Given their history, nobody needs to assume this time that if the banks think lending you money is a good deal for them, it must be a bad deal for you. The reverse is just as likely to be true.
More likely still is that, unlike the 1980s, when lenders and borrowers alike lost out because the money went to buy already over-valued properties, this time the outcome is more likely to be a win-win solution, with purchasers and lenders both benefiting from buying assets that, even if they are not yet at rock-bottom prices, are certainly not over-valued.
Measures of affordability and banks' willingness to lend only tell you where house prices stand today relative to past experience and to the general economic picture. They do not tell you whether the market has peaked or troughed in its current cycle.
Calculating the turning point in any market is a function not of value, but of the liquidity and dynamics of the market's participants. Who are the buyers and sellers, and what do they think is happening to prices?
It is on this count that the omens for the housing market are beginning to look so much more positive. All the recent survey and anecdotal evidence suggests that we are approaching the point where price expectations are at last coming back into line with realities. As Lord Rees-Mogg, the former editor of the Times, pointed out the other day, the fact that the Bank of England has now joined the ranks of those who are prepared to say formally that house prices are likely to remain depressed until at least the turn of the century is itself an important indicator that the opposite may now happen.
The Bank's stance shows that the bearish view on house prices has now become today's orthodoxy - a necessary precondition if there is to be any dramatic turnaround in prices. We have already had a professor at Manchester Business School predicting that house prices may never rise again (I exaggerate, but only a little), and countless other learned opinions to the same effect.
This week we have also had yet one more important indicator. A regular survey of estate agents by Birmingham and Midshires Building Society shows that estate agents too are now unanimous for the first time in expecting prices to fall.
When even estate agents start to talk that way, you can be sure that the bottom of the housing market cannot be far away. It is only a matter of time before the market starts to rise.
If the Government does decide to throw in some more tax incentives, and prices start to recover, as I expect, you can be sure that it will try to take all the subsequent credit for it. But like this week's currency intervention by the central banks, which had such a dramatic impact on the dollar and the yen, its measures will work only because the market itself has already started to turn.
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