Houses stay on the market longer

Earlier this week, Hometrack published their January survey of the housing market. Over the next day or so, I will post some of their latest numbers. The first chart looks at the average time a house stays on the market. Currently, the average is 10.2 weeks; up from 10.0 in December 2010

UK property prices in 2011 - up or down?

So what is it going to be? A return to the bubble years, or a renewed property price crash?

Recent price developments haven't provided much guidance. As the chart illustrates, UK nominal property prices have been treading water for the last nine or so months. They have shown little inclination to go either up or down. Insofar as a trend can be identified, the market appears to be weakening very slightly. Since August, prices are down 0.5 percent. However, that is hardly the sort of decline that will give the nation's rapacious real estate agents sleepless nights.

UK property prices ended last year on a downswing. In December, the Acadametrics national index fell 0.2 percent, compared to the previous month. For the year as a whole, house price inflation was just under 3 percent, and therefore slightly lower than the overall inflation rate. In real terms, house prices fell by the smallest of margins.

Most predictions point to a further round of price declines in 2011. As always, much will depend on the future path of interest rates. If the Bank of England starts to hike the bank rate, the conventional wisdom is that the housing market will weaken.

However, we live in bizarre times where the normal rules no longer apply. In the short run, a rate hike from low current levels won't make much difference to mortgage affordability. Any homeowner with half a brain cell will have already locked in their super low rates when they remortgaged.

Ironically, a rate hike will signal improved economic conditions and an exit from the financial crisis. This will strengthen consumer confidence, which might spillover into the housing market. A rate hike will also improve the functioning of credit markets, which could also increase mortgage approvals.

However, if the Bank delays a rate rise, bad things will happen. It will prolong the pervasive sense of turmoil and weaken consumer confidence. It will also give further credence to the growing expectation of more inflation. If the delay extends into the second half of the year, higher inflation expectations could push long run interest rates upwards, and open up the possibility of a slowdown in GDP.

So how does this inverted story - where a rate hike buttresses consumer expectations and the housing market - fit into the long run assessment that property prices are overvalued? The 2008 house price crash was unusual. Prices fell in nominal terms, which is a rare event in property markets. In previous corrections, the downward adjustment was slow, with rising inflation and incomes doing all the heavy lifting. Homeowners are invariably reluctant to accept nominal price reductions, but seem prepared to absorb an inflation induced adjustment. The future correction is likely to return to a more normal pattern of seller denial, and a slow deterioration of home values as consumer price inflation outstrips house price inflation.

An early rate rate might affect the adjustment path, but it will not affect where prices will be over the long run. Within five or so years, the UK property market will have given up all those gains recorded during the bubble. A delayed rate hike, ironically, might actually speed up the adjustment path, since it will both weaken consumer confidence, and strengthen the growing inflation momentum that is now building up within the UK economy.

For what it is worth, and it is not much, I think the Bank of England will delay the rate hike. Accordingly, house prices will weaken during the first six months of the year. Inflation will pick up, and by mid-year some alarming consumer price index numbers will begin to be printed. At first, there will be denial within the MPC, but eventually there will be a panic rate hike, probably towards the end of the summer.

Once the MPC have come to their senses and begin normalizing the economy, a sense of calm will prevail. Overall, it will be a good thing, but as always, UK home owners will over-react. Towards the end of the year, house prices will temporarily stabilize, and perhaps rise.

So where will house prices be this time next year? It is only a personal view, but I think they will down slightly on where they are today. although I would not rule out the possibility that they are flat, should the MPC raise rates earlier than anticipated.

(Finally, just be clear, this my humble opinion, and it is for entertainment purposes only. If you are in the business of buying property this year, make your own mind up. I make no recommendation to buy, hold or sell.)

UK House Prices - Property prices in Cornwall are up 169 percent

It is just another case of UK house prices being bid up by outsiders. People from the South West often complain that wealthy outsiders, especially from London, come into the area and bid up the property prices. The consequences are stark for low and middle income families who can no longer afford to own a house in their own neighbourhoods.

House price data from Cornwall seem to support the accusation.  Since 2000, house prices in Cornwall have increased by 169 percent, far outstripping local incomes. Prices came down slightly with post-financial crisis correction.  However, prices began to rise again in 2010.

Personally, I think Londoners should only buy houses in London. If they want to go there for a holiday, then they should stay in a bed and breakfast.  Leave Cornwal alone.

Still overpriced

The bubble may have burst, but property still looks overvalued when compared to average earnings. Currently, the ratio of house prices to incomes stands at 4.6. The historical average, which includes the recent bubble, is more like 4. A reasonable ratio would be something closer to 3.

Free money

Why didn’t someone think of it before? It is so obvious. The logic is so simple. If the housing market is collapsing from a lack of credit, then why doesn’t the government step in and offer free loans to first time buyers. Problem solved. As soon as the money comes on line, house prices will stabilize. First time buyers will come flooding back into the housing market, waving their free loans at risk-averse banks.

How did Brown and Darling justify this extraordinary generosity? In announcing their housing rescue package today, three themes kept cropping up; the first two were explicit while the third was implicit.

Give me the confidence

Confidence was the first theme of the day. With the onset of the credit crunch, Brown claimed that people had lost confidence in the housing market. Banks, buyers and sellers were all trapped in a crisis of self-doubt and uncertainty. Banks wouldn’t offer credit; buyers without credit could not make viable offers, while sellers had not reconciled themselves to lower valuations. The government’s housing package will put a floor on prices, this would buttress confidence, and gradually things would return to “normal”.

Help the home buyer

First time buyers were the second prominent phrase of the day. The government package intended to clear the path for those starting out on the long road to property ownership. Hazel Blears was on the TV this morning, talking like an estate agent. She told viewers that the new measures would allow young people to get a footing on the property ladder.

Housing inflation equals economic growth

The third big idea was rather more implicit. No one said it directly, but hinted that the economic growth depended on a thriving housing market. Kirstie Allsop came closest to pointing out the connection on Radio Four Today, when she offered support for the government’s plan. She pointed out that without housing transactions, people stop buying white goods; furniture gathers dust in the storerooms, while plumbers and builders remain unemployed. Therefore, the revival of the housing market is essential if the UK economy is to keep on growing. This theme can be expressed in starker terms; we all benefit from housing inflation, even those who are priced out of the market, because housing bubbles hold up economic growth.

Ineffective, costly and possibly both

None of these themes can withstand thirty seconds of serious scrutiny. Take, for example, the confidence and the government’s capacity to hold up prices with free credit.

In order to stabilize the housing market, the government would have to offer massive amounts of free money. A few simple numbers will prove the point. Between March and July this year, the total outstanding amount of mortgages outstanding owed to Banks fell from ₤559 billion to ₤546 billion – shortfall of ₤13 billion. Assuming a five percent interest rate, the government would need to supply ₤650 million in order to make up the shortfall in just four months. Simply put, the free loan scheme will either be ineffective or astronomically expensive. It might also be both. However, it will not put a floor on house prices because the government does not have the resources to supplant bank credit.

Will it help first time buyers? It might help a few, but the vast majority will be left worse off. Suppose the government offered ₤30,000 interest free loans to 20,000 home owners, the government would need to supply ₤600 million worth of credit. The number 20,000 represents one month’s shortfall of mortgage approvals this year relative to 2007.

To put it mildly, 20,000 doesn’t really begin to cover the number of bitter people who have been shut out of home ownership due to the bubble. Besides, first time buyers were receiving huge assistance from falling prices. It is hard to see how stabilizing prices at the current inflated levels helps anyone trying to buy their first house.

Turning to the third, implicit theme; does the UK economy need the housing market so badly that the government should try to subsidize grotesque house prices with free credit? Are we really that dependent on inflated property values? These are the wrong questions to ask. A better one would be how should the government act to unwind the UK’s extraordinary vulnerability to its property market? It is a difficult question, and it is hard to see an answer that does not include some kind of significant slowdown in economic activity. Since this question only offers difficult answers, the government prefers to hide behind a seemingly simpler task of holding up property prices.

Get prices right and everything will be alright (eventually)

The first crucial step towards solving any economic problem is to get prices right. Once effective demand equals supply, incentives are properly aligned, and markets will perform reasonably well. If any government interferes and sets up a policy based on sustaining misaligned prices, then it is only adding more difficulties upon the existing pile of problems. House prices are misaligned from long run fundamentals. In order to purchase a house today, home buyers need huge loans that place an unbearable burden on long term personal finances. Banks are no longer willing to supply credit because they have finally come to realize that default risk has risen to unacceptable levels.

Delaying the inevitiable

New Labour is unwilling to recognize this reality. Instead, it offers another misaligned price; zero interest loans in order to sustain overpriced property prices. Brown and Darling can harp on all day about confidence, help for first time buyers and the weakening economy. This package will only delay the inevitable.