Here comes the next phase of the UK housing bust
By
MoneyWeek Editor
John Stepek Jul 13, 2010
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The housing market in Britain seems to be invulnerable.
Even the worst post-war recession seen in Britain – with a 6.4% peak-to-trough fall in GDP, even worse than the original estimate of 6.2% – couldn't keep prices down for long.
According to The Times, house prices in the UK fell by around 20% from peak (October 2007) to trough (February 2009). Since then, the average price has risen by 15%. That means they've already retraced slightly more than half of the original slump.
You can't go wrong with bricks and mortar, as the old saying goes.
Well, we'd reserve judgement on that one. Because it looks like the housing market is having another wobble…
Sellers are returning to the market in droves
We've already seen Halifax report that house prices have fallen for three months in a row. This morning, the latest survey from the Royal Institution of Chartered Surveyors (Rics) is in. And the data for June suggests the price falls will continue.
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For a start, sellers are coming back to the market in droves. Property prices have been helped over the past year by a slump in the number of people putting their homes on the market. The recent return of sellers is to a great extent down to the scrapping of the Home Information Pack (Hip).
This might seem odd – after all, the cost of a Hip is hardly significant in the grand scheme of property transaction costs. But in fact, it makes perfect sense. The prospect of shelling out several hundred pounds to attempt to sell your home may not have been a big deal when the market was buoyant.
But when you've no idea whether anyone will make an offer you're happy to accept, that few hundred pounds suddenly becomes quite a large hurdle.
Now that people can put their properties back out there to 'test' the market at no cost, they are jumping at the chance. According to Rics, the number of sellers is rising at its fastest rate since May 2007.
But the number of buyers is drying up
Meanwhile, the number of queries from buyers fell, for only the second time since 2008. Indeed, according to one agent, "sellers now exceed buyers."
More sellers, fewer buyers – we all know what that adds up to. And indeed, agents reported the weakest price rises seen since last July. Perhaps more significantly, more agents expect prices to fall than to rise – that's only the second time this has happened in the past year.
Meanwhile, accountancy group PricewaterhouseCoopers (PwC) reckons there's a 50% chance that 'real' house prices (i.e. adjusted for inflation) won't recover their 2007 peaks until after 2020. Now, I find these sorts of forecasts hard to take seriously. We've no idea what'll happen in the next ten years – if this turns out to be correct, it'll be as much luck as anything else.
But John Hawksworth of PwC does make a good general point when he notes that: "Housing is a risky asset that is not guaranteed to generate positive real returns in the future even though this has been the pattern in the past."
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- Why UK property prices are going to fall 50%
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The FSA is getting tough on the home-loan market
As if all this wasn't enough, the Financial Services Authority (FSA) is now getting to grips with the home loan market. And about time too. A staggering near-50% of the home loans doled out between 2007 and the start of 2010 "did not require proof of earnings," reports the FT this morning.
Even more worryingly, the watchdog also found that 46% of households holding a mortgage between 2005 and 2008 "either had no money left or had a shortfall after mortgage payments and living costs were deducted from their income."
The FSA is suggesting – quite sensibly – that banks should check that people can afford to pay their loans before they take them out. They are also suggesting that people shouldn't be allowed to take out interest-only loans unless they can afford to repay the capital too.
The Council of Mortgage Lenders is up in arms of course. And there's no doubt that added regulation will have unintended consequences and make it harder for some people to get loans. That's why we're not generally keen on regulation as a solution.
As my colleague Merryn Somerset Webb has noted, if we had decent financial education in this country we wouldn't need all these rules. People would be able to take an informed judgement based on the likely path of interest rates, the current level of house prices, and their own job security, in order to decide for themselves whether to take the risk of using an interest-only loan.
But given that banks just nearly destroyed the global financial system by lending irresponsibly to would-be homeowners, you'd think they might have considered putting some of these measures in place themselves by now. Even tougher borrowing criteria will of course make it harder to fuel any continued rise in house prices. But would that be such a bad thing?
As the FT's Martin Wolf pointed out in a recent piece calling for a land tax to curb speculation, it's "bizarre" that "newspapers hail upward moves in the price of a place to live – the most basic of all amenities." To alter our country's vulnerability to the property cycle would require a lot more than just tighter controls on borrowing.
But the chances of anything more radical happening seem very slim – there are too many vested interests dependent on the existing system. So expect the boom and bust cycle to continue (read land tax specialist Fred Harrison's 2005 piece for MoneyWeek in which he predicted the 2008 crash. And for now, we're in 'bust' mode.
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