The mystery of rising house prices
With unemployment up and people avoiding debt, why aren't property prices falling? Sean O'Grady reports
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Prices ought to be tanking. And yet ... the Royal Institution of Chartered Surveyors sees a gathering wave of optimism among surveyors
What on earth is happening in the housing market? Of the many economic puzzles thrown up by the recession, this is the most mind-boggling – for homeowners, first-time buyers and the wider economy.
The conundrum is this. Unemployment is close to 2.5 million and will go higher. Pay rises are rare. People fear debt. The credit crunch has hardly gone away, meaning that mortgage finance, especially for first-time buyers with slim deposits, and movers with little equity, is expensive, if available at all. Mortgage approvals may be up on last year, but the new money going into the market isn't sufficient to secure rising prices. Values are steep by long-term historical standards in relation to earnings, especially in London.
So prices ought to be tanking. And yet ... the Royal Institution of Chartered Surveyors sees a gathering wave of optimism among surveyors watching their local property scenes, and the Nationwide has just reported rising prices for the sixth month in a row. Prices are stabilising, even rising – 0.4 per cent during October, up 2 per cent on last year (though prices are still about a fifth off their peaks). Why? And can it last?
The immediate answer given by all those involved is "shortage of supply". Owners are just not putting their properties on the market, and those that are are often asking unrealistically high prices, though the chill of recession has jolted more into narrowing the gap between what they ask for (as monitored by Rightmove) and what they settle for (as recorded by the Nationwide, Halifax and the Land Registry).
This is not just a question of sellers being in denial about negative or inadequate equity, though there is a psychological reluctance on the part of sellers to accept a loss. That lack of equity in many homes has a more concrete effect – it means that moving is difficult at a time when lenders are imposing more demanding terms, such as lower loan-to-equity ratios and more conservative multiples of household income. New rules from the Financial Services Authority that tighten up rules for self-certified and other unconventional customers will exacerbate this trend.
Plainly, banks are only really willing to take on the best credit risks: their precarious balance sheets and losses prevent them from shouldering risks that would have been routine three or four years ago. So, perversely, the lack of mortgage finance has actually pushed prices higher by artificially constricting supply.
Second, the waves of repossessions during the property slump of the early 1990s hasn't materialised, and seems to be another perverse product of the credit crunch. Again, such is the fragile state of many bank and building society balance sheets that few want to crystallise losses by foreclosure. One of the reasons why the bad debts being reported by the banks aren't as high as they might be is because they can't afford any more write-offs – so they just let the arrears run. Possibly also because of political pressure, lenders are exercising extreme leniency with wayward mortgage holders. This unprecedented forbearance is blocking another source of ready supply – auction sales from distressed sellers.
Third, there are signs of increased demand. Confidence is better, after the apocalyptic mood of much of the past year or so. And there are those out there who are cash-rich. Very cash-rich. At one end, Russian oligarchs and other wealthy foreigners and investment funds are attracted by Britain's real-estate double whammy – depressed values plus a sharply depreciated pound adds up, in crude terms, to a 40 per cent discount on peak 2007 prices. Tempting, for some, including speculators who buy some of the best real estate in the capital and allow it to crumble or be squatted.
Banking bonuses seem hardly dented this year, another underpinning. Other pluses are opportunistic buy-to-let investors seeking yields (compared to gilts or deposit accounts, say); those whose parents can supply a cash injection; and those who sat out the bubble and are ready to pounce on bargains now. Much of this activity is in the South, one reason why this part of the country has enjoyed a healthier market.
Yet it is in the nature of markets that most, if not all, of these perverse effects are short-term, and that the fundamentals will eventually re-assert themselves. There will come a point when the pound stops falling; a moment banks can no longer let arrears run; and when the Bank of Mum and Dad runs out of funds.
Other factors, too, are liable to grow more difficult next year at least. The stamp duty holiday on homes costing up to £175,000 will end in the new year, as will the cut in VAT. Next year will see more tax rises, modest pay rises, if any, and interest rates begin to return to slightly more normal levels – perhaps 2 per cent by the end of 2010.
The Countrywide chain of estate agents says that the average interest rate for mortgage applicants is 5.13 per cent, down 0.31 per cent from September but still high in real terms. The average deposit required for mortgages monitored by Countrywide is 25 per cent – 6 per cent up on September. The 125 per cent mortgage is but a distant memory.
We'll also see higher fuel and energy prices as demand from China and other fast-growing emerging economies push them back towards their old peaks. Unemployment will also be higher. All this means a tight squeeze on people's disposable income – their ability to service a home loan.
So there is plenty to suggest that the stabilisation and small rise in values now being witnessed may be no more than a false market, a short-term "boomlet" that will dissipate as the market faces new problems. Prices seem back on their long-term trend level now, but there is every reason to think an undershoot may also be possible, as in the past.
The truth is that the credit crunch is still a reality – wholesale money markets remain dysfunctional and only tiny quantities of mortgage-backed securities are being issued. Those markets and the now-disappeared foreign banks are what funded the housing boom. They have been largely replaced by money from the Treasury and the Bank of England. That cannot last for ever, as schemes such as the Bank's Special Liquidity Scheme expire next year and in 2011. Economists are almost unanimous that the bottom of the market has not yet been reached; then again, only a couple of years ago they told us that prices would be flat in 2008 before resuming their upward march this year ...
The property conundrum remains unsolved.
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Comments
The only minor mystery is why prices haven't tumbled ~30%++
You say about lenders :
"They have been largely replaced by money from the Treasury and the Bank of England."
I say check out :
http://burningourmoney.blogspot.com/200
Really, head in the sand or up a_r_s_e - I really can't decide
Nobody's doing real morgages - nada, zip, nuttin - Labour have seen to that.
I think historically, house price indices tend to behave with volatility (at a local level) during periods of recession and/or high unemployment.
Sell your property now, maybe take a bit if a haircut on the sale price and sit and wait or take what profits you have. By then end of 2010/ Q1 2011 you will get the bargain of a lifetime.
Better than those bits of paper that get peddled.
there is not the abundance of houses for sale to fuel a downturn. First time buyers have been prices out of the market for many years .So there is not the house owners have lost the ability to downsize to save money like they have done in previous housing downturns .Add to that the many people who are still in good jobs and are able to take advantage of low interest rated and relatively cheap upgrade housing .
It is crazy that the measure of "good" is based on house price</> inflation (again) rather than house sales volume. Any salesman in a proper industry saying he had lousy sales but good prices and loads of excuses would be encouraged to find alternative employment, perhaps to become an Estate Agent. Whose comments, incidentally is what the RICS survey is based on - estate agents. And they never lie or mislead, of course....
I would have thought a lack of mortgages would constrict the supply of buyers rather than sellers.
It's sitting in the BOE, it's sitting on the public finances. The real credit crunch will
be spread over the next 10 years and wouldn't get too excited about a return..
our banks have years of digging ahead of them, yet.
The estate agent hasn't paniced, some areas are so wealthy they can ride this out.
Then there's creative accounting, keeping assets artificially high. Perhaps some
have noticed the latest one, where mysteriously offers are being put on 5K above
the price, ( totally out of character with the market ). Don't underestimate the agents
ability for some artificial ratcheting. Some advertise houses without the government
assistance......
Then there's the cash market, which others have pointed out.
Them there's the method of statistic, it's not straight calculation. Some are based
on the loan itself.
Isn't money just wonderful.
Meanwhile, families are stuck in teensy two-up-two-downs.
The banks also know that the USA will declare bankruptcy within a few months which will be the signal for the introduction of the new Amero currency for North America and the birth of the New World Government.
The global economy will be allowed to collapse. Food will be priceless. The corporate work environments that govern our incomes will fail. Millions will suffer.
As a consequence of this, home owners without incomes will once again lose their homes to the banksters who will run this New World Government.
Thanks to acceptance of the Lisbon Treaty implies Europe is already run by this same elitist group.
So millions will disenfranchised from their property and land and spend a lifetime of enslavement to debt.
Fantasy. Its happening right in front of your eyes
All this drivel about percentage interest and market conditions has absolutely nothing to do with this growth. The banks know what is coming, so they want as many people borrowing long term from them at the highest loan value quickly as they stand to profit handsomely.
If you cannot afford to invest in gold or other commodities then invest in banking. They are set to make another killing.
The banks also know that the USA will declare bankruptcy within a few months, the dollar will crash, which will be the signal for the introduction of the new Amero currency for North America and the birth of the New World Government.
The global economy will be allowed to collapse. Food will be priceless. The corporate work environments that govern our incomes will fail. Millions will suffer.
As a consequence of this, home owners without incomes will once again lose their homes to the banksters who will run this New World Government.
Thanks to acceptance of the Lisbon Treaty implies Europe is already run by this same elitist group.
So millions will be disenfranchised from their property and land spending a lifetime of enslavement to debt. Those able to concert deals with their lender will become slaves to this debt.
Fantasy. Its happening right in front of your eyes.
All this drivel about percentage interest and market conditions has absolutely nothing to do with this growth. The banks know what is coming, so they want as many people borrowing long term from them at the highest loan value quickly as they stand to profit handsomely.
If you cannot afford to invest in gold or other commodities then invest in banking. They are set to make another killing.
the problem is that there are too many self appointed gurus who just create made to measure statistics to lure the public one more time into the market whether stocks ,commodities or housing.
the system is far too corrupt to be trusted.
Estate agents are over-valuing, taking every opportunity to 'talk the market up' & are seen as the only place to go for opinion by the national media, just what to expect a sector to say when it's income relies on increasing its product price?
In actual fact many houses are still below the market value of 07 when residential properties were still being 'talked up' well after the market was in decline, many belong RICS which oddly holds a 'royal warrant'
Most of the calculations seem to be based on the usual suspect, London whereas the rest of the UK is still in decline.
1)The bankrupt banks now have endless "liquidity" from QE but ONLY make ultra low risk loans to those with the cash for a sizeable down-payment.
2)The BTL bubble has been given a stay of execution with a 0.5% base rate. Rents are propped up courtesy of the government's overgenerous Housing Benefit give-away.
3)The Labour government has in effect placed a moratorium on repossessions, paid for with mountains of taxpayers' money. People who can't afford their overpriced property are now bailed out by those without mortgages. Those FTBs entering the market will be paying for their overpriced shoebox and someone else's! Not exactly fair.
4)The property propaganda machine has been in full swing - for every dreadful economic indicator the property fraternity has an illogical and perverse argument as to why prices can only go up. (So a housing shortage is a good thing?)
The question is how long can this last and what happens when it stops?
Please do some proper research before publishing such inaccurate rubbush
It's a huge gamble that the medicine will work in time before it runs out!
It's all very well owning a home, but I wouldn't want to do anything speculative with property just now.....anyone with an ounce of sense can see what's going to happen when the plug gets pulled!
Only the best houses, at reasonably reduced prices from the peak of the bubble, are selling.
The operative idea is sell it now, while you can. Prices are going to fall further next year, and the year after.