The shifts versus the blips: Opinions differ sharply on the reasons for the movement in the housing market

HOUSING market commentators fall into two groups. There are those who are repeatedly discovering a 'fundamental change' in the underlying structure of the housing market. And there are those who view such claims as misinterpretations of minor bumps in its normal cyclical pattern.

Rob Thomas, who has just taken over from John Wriglesworth as housing market guru at UBS, falls into the second category. His latest analysis for the broking firm plumps firmly for the reassertion of the traditional cyclical pattern. The hesitant splutterings of the last couple of years are little more than 'pot-holes on the road to recovery', he says.

His forecast predicts a 6 per cent rise in house prices by the end of next year and a 50 per cent rise by the end of the decade, when the average property will cost around pounds 92,000.

While that looks a large figure, most of the rise is accounted for by the bank's expectations for inflation. The projected recovery is actually weak by comparison with earlier booms and busts, he says.

Since the Second World War, there have been four deep depressions in the housing market and three dramatic booms. Surprisingly, the current decline is neither the steepest nor the longest, although it is the first in which nominal house prices have fallen significantly.

Nevertheless, the depression of the 1950s saw real house prices drop by around 3 per cent a year for almost a decade; a total decline of around 30 per cent.

The 1970s collapse was even sharper: a total decline of 33.6 per cent, or 8 per cent a year for four years. The 1980s recession was relatively short but sharp, with prices falling 14 per cent over 18 months. By comparison, this slump has lasted five years, but prices have only dropped 29.1 per cent or 5.5 per cent a year on average.

Like many, UBS believes the adjustment has gone too far. Real (inflation-adjusted) house prices have fallen well below the trend in real incomes. This is important since housing, the argument goes, is one of the main things we spend our money on. If we have more money we bid the price of housing up accordingly. In the long term the two measures move in line.

Since the 1960s, the average property has cost about three and a half times average earnings. During the booms of the 1970s and 1980s house prices rose much more sharply; at the peak in 1989, the average home cost more than five times average earnings. However the multiple has now slipped to 3.3, well below the long-term average. The continuing growth in real incomes will be one of the key factors dragging up house prices over the next few years.

More controversially, Mr Thomas also sees the number of properties changing hands each year increasing by more than 40 per cent, from around 1.2 million in 1993 to 1.8 million in 1997 and 1998. That compares with about 2 million transactions in the peak boom year, 1988.

Turnover matters since the greater the number of properties bought and sold, the faster prices tend to rise. But UBS's figure is based on the fact that around 11.4 per cent of owner- occupied housing in the UK has tended to change hands each year since the late 1970s.

The 'fundamental changers' would argue that this ignores those sucked into owner- occupation in the 1980s, either through right-to-buy or because they were pushed into buying earlier than they would otherwise have done. They have boosted the size of the owner- occupied sector, but are less likely to move as frequently as the traditional owner-occupier, especially since many in both groups are trapped in negative equity. Take them out of the equation and turnover falls to around 1.5 million - roughly what it has been since 1977.

Equally controversial is the impact demographic shifts in the UK will have on the housing market over the next few years. The fundamentalists argue that the baby boomers of the 1960s fuelled the 1980s housing boom. But individuals in their twenties peaked in 1990 at 9.3 million and will fall to 7 million by 2005, producing persistent weakness in the housing market.

Mr Thomas is one of many to disagree, arguing that the impact will not be felt until well into the next century, and that the tendency of younger people to put off buying a property over the last few years has actually created a pool of potential first-time buyers.

In addition, continuing growth in the number of people living in smaller household units will compensate to some extent for the underlying demographic slide.

(Photograph and graphs omitted)

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