Hamish McRae: At last, shafts of light are shining in the windows of the housing market
Sunday 31 May 2009
Might the housing market be on the turn? It is a tantalising possibility and something that hardly anyone was predicting even a couple of months ago. The majority view would on balance be that there are further falls in sight, perhaps another 10 per cent on average, and that the ultimate floor will not be reached for another couple of years. But minority views are always more interesting than majority ones and in this case they are supported by the latest data, which seems to show at least a bounce taking place right now.
That bounce is not at all conclusive and may simply result from the near-freeze in activity that took place through last autumn and winter. It may simply be that some people are fed up with renting and are able to get cheap enough mortgages to make the switch to buying sensible, even if prices do fall somewhat further. Or it may be that some people are prepared to buy now on the grounds that, on a five- or 10-year view, today's prices will look reasonable. Besides, even in a generally dark market, you always get surprising shafts of light. The fall in sterling against the euro has certainly encouraged Continental European buyers to look at UK purchases, though that is quite a narrow market centred on London and the South-east. But even allowing for all that, there is enough evidence to start taking the "bottoming out" case seriously. So here it is.
The starting point is the relationship between house prices and average earnings. The rule of thumb has been that prices fluctuate around a norm of three times household disposable income, maybe a little higher. On that basis, prices now are still too high. But as a new paper from Simon Ward at Henderson points out, if you take a longer-term perspective there seems to have been a gradual increase in this ratio. Back in the late 1960s it was nearer two times disposable household income. Could the sustainable level now be, say, four times? Suddenly prices begin to look, if not particularly cheap, at least OK.
There is a second way of checking whether valuations are reasonable, the ratio of prices to rents. People have to live somewhere, and for the past couple of years many would-be buyers have decided to rent while waiting for prices to fall. So rents have begun to edge up in response to this demand. As Simon Ward argues, relative to rents, purchase prices now are reasonable.
If this argument proves right, it would mean that this property downturn will have been less serious than that of the early 1990s. Were that pattern to be repeated we would have to wait until 2012 until there is a real bottom, and 2014 before prices really resume an upward march. That seems a long way away.
There are a number of reasons to suspect that this time things will be better than in the 1990s. Interest rates have been slashed, whereas then they were driven up to double digits (Our problem now is availability of finance, not the cost). Mortgage issuers are being more conservative in their eviction policies, working harder at keeping some element of a debt being serviced, rather than taking possession of the property.
Home owners in trouble may have the option of renting out their property and living somewhere cheaper – using the gap to keep some interest payments going. Unemployment, while rising, is not racing upward at quite the same terrifying pace that it did then. Indeed, the only thing that makes the current situation worse than the 1990s is that the starting point of prices was higher relative to earnings.
But now let's consider the more mainstream view. It would argue that there will not be a turning point in unemployment for another 18 months at best. It would stress that present low interest rates will be hard to sustain, particularly if longer-term rates start to climb as seems to be happening. Average earnings in money terms will continue to remain compressed, with many people in the private sector experiencing pay freezes or even cuts. That will delay the correction between average earnings and prices, for, obviously, the slower wages rise, the more prices have to fall to restore any particular ratio between the two. Tax increases in the future will compress post-tax earnings, even when pre-tax ones start to climb again. And finally, for what it is worth, the futures market in house prices (yes, there is one) suggests another couple of years of decline.
Put the two together and what should one conclude? We are undoubtedly getting a gradual recovery in confidence in financial markets worldwide. There will be bumps ahead but not many people now expect share prices to go below the levels they reached in early March this year. That is not a huge direct source of comfort for householders because the two markets can move in very different directions: they did in the period 2000-2003. And many people with reasonable savings will need to rebuild them further. But it does mean there will be some general financial confidence around and some funds to support home purchase. Should prices fall much further, "bottom-fishers" will be attracted to the market.
So I think we are not that far from a floor. But that is not to say there will be any significant recovery for some time. I could see general prices moving in a narrow range, plus 10 per cent or minus 10 per cent of present levels for another four or five years. In fact we would have returned to reasonable stability in the housing market.
If that is right, it is quite encouraging. The dreadful social cost of people losing their homes, all the misery and despair, will be contained. Yet young people who need to buy will be able to do so at a less outrageous cost. There will, doubtless, eventually be another house-price boom when memories of this fade, and doubtless a bust thereafter. But we might have a real period of solidity, when people regard homes as places to live in rather than to make money out of. The sooner that day comes, the better for us all.
Welcome to the new financial powerhouse of Europe – Malta
A crisis is also an opportunity. That is the rather annoying but also quite useful comment being made nowadays in the business and financial communities. However, I had a new perspective on the opportunities in financial services during a brief visit to Malta last week. At a time when most developed countries are seeking to clamp down on finance, Malta is looking to double the size of its financial services industry. Its target: to have 25 per cent of its GDP coming from finance within a decade.
I found that fascinating: not just that it should be trying to do so but that it seems a realistic aim. How?
Start with the basics. This is a country in the EU and the eurozone that has English as its business language. It is on the OECD "white list" of countries that comply with all the anti-tax evasion and money laundering requirements. Its banks are solvent and don't rely on money-market deposits to fund their loan books. It has avoided the sub-prime fiasco. And it is small, with a population at 400,000 roughly the same as Luxembourg, but not as tiny as the Channel Islands.
The question, then, is how to find a niche. Here Malta is eschewing the tax-avoidance, high-net-worth individual slot, though it is seeking to attract more residents from the rest of the EU. Rather it is trying to attract institutional business in banking, fund management and insurance. The idea is that it can offer high-quality services at a much lower cost than the established European centres. You could say it is going for mid-market slots rather than exotic niches. So far, it seems to be working. Direct employment in finance has gone up from around 5,000 to 7,000 in the past few years, which would be equivalent in UK terms to about a million jobs. And there are many more employed in business, legal and accounting services.
Realistically, what happens in niche financial centres is not going to change the face of finance. But the current attack on offshore financial centres that are deemed a bit dodgy does create opportunities for those that keep their noses clean. Even a modest fragmentation of the industry can bring disproportionate benefits to a place such as Malta.
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