Markets need not fear house moves

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The Independent Online
The most important single domestic influence on British financial markets over the next couple of years will surely be house prices. If they remain stagnant, this will restrict consumption, general inflation, and interest rates. If, on the other hand, they start to pull away, all post-war UK experience suggests that this will feed through into general demand.

The impact of house prices on the economy and on financial markets gives a wider importance to the spat between Woolwich and Halifax building societies over prices. Halifax says they are flat and will remain so; Woolwich says not in the South-east, where they are rising at an annual 2.5 per cent.

The obvious point to be made here is that historically the South- east housing market, like the region's economy, has tended to lead the rest of the country into the cycle, as well as experiencing sharper swings. So if Woolwich is right and house prices in the South-east really are moving upwards, albeit only by a modest amount, then this may be a warning light for the rest of the market.

Is Woolwich right? The pattern of house prices will be looked at in tomorrow's paper by Anne Spackman, so would-be movers should wait 24 hours for a definitive verdict. But it is worth observing at this stage that top-of-the-market houses in London do seem to be moving up sharply. That may be the result of the special attractions of London to foreigners, who will have found that sterling devaluation has made homes some 15 per cent cheaper than they otherwise would have been.

There was new evidence yesterday from Barclays Bank, not on prices as such but on mortgage lending. The trend of lending should give a leading indicator to movement in the housing market, which in turn has implications for demand on some consumer durables: when people move house they tend to buy new washing machines and cookers. Mortgage lending figures are published by the Bank of England, but Barclays' figures should give an early indication of what the Bank will say.

Careful treatment

But all mortgage lending trends need to be treated a little carefully, because it is hard to know what to make of the figures. For example, these new ones show mortgage lending rising overall in August, but with a sharp decline in one region, the South-east. What does that mean? Are people there - in the richest part of the country - becoming more cautious about borrowing, perhaps because they are more aware that the next move of interest rates will be up? If so, is that an early sign of a national trend? And how does flat borrowing square with the Woolwich view that house prices in the South-east are moving up ahead of those of the rest of the country?

There are no easy answers, except to take an overall view of the trend in mortgage lending over the past 18 months and say that as yet there is clearly great caution on the part of borrowers and certainly no sign of an incipient boom. Without a boom in lending there will not be a boom in house prices.

The view that the cyclical recovery in house prices will be much weaker than the market expects was set out by the gilt specialist HSBC Greenwell in a circular last month. The argument was that the features that had particularly exacerbated the last cycle, deregulation and speculative purchases, will not occur in the next one. Deregulation had a once-and- for-all impact that has ended, while the experience of large losses on property would curb speculative behaviour. As a result the level of housing transactions would remain well below that even of the early 1980s, of 12-14 per cent of the housing stock. (While the numbers of homes that changed hands will be higher than in the 1960s or 1970s because a much larger proportion of the housing stock is owner-occupied, the proportion of the stock that is traded could go back to below those levels: perhaps 10 per cent of the stock, against 8 per cent at the moment and 15 per cent in the late 1980s.

Houses as homes

The central point here is that people will buy homes to live in, not to speculate. If so there may be a modest rise in transactions in the months ahead, but there will be no surge - certainly nothing to add to general inflation.

If this is right, and the growth of consumption in any case is starting to tail off, then a lot of the market's autumnal worries will evaporate. On an extreme view one could even see a new gilt boom next year when it becomes clear that inflation is not going to grow nearly as much as the market expects. That may seem a tall order, but if the housing market remains flat, not an impossible one.