British house prices are heading for long-term decline
Investment Director – The Fleet Street Letter
David Stevenson Dec 07, 2009
Surely it's time to sound the all clear for Britain's housing market?
In November, house prices rose for the seventh month in a row, according to the Nationwide. Values are now up 2.7% year-on-year. Home loan approvals rose again in October. And one housebuilder, Bellway, has even said that current sales are 10% ahead of last year.
So why are we still bearish? Because this isn't the whole story. In 2010 and beyond, prices could head right back down again. Here's why...
Four reasons why house prices are headed for long-term decline
Last week's upbeat housing news was seized upon by property bulls as a further sign that the market has bottomed. It comes on top of the most recent unemployment figures, which showed that in the three months to September, the country's dole queues shortened slightly.
Employment data is one of the most important indicators of what's likely to happen to property prices. So if British job losses really are levelling out, that could really bolster the market. But the opposite would be very bad news.
1. Unemployment is going to rise for a while yet
And that's the problem - that September job statistic looks like a false dawn. Even Alistair Darling confessed recently that, "unfortunately, unemployment will continue to rise for a while".
With a general election looming next year, he wouldn't have been keen to admit this. But it looks like he's right. Last week a string of companies said they're shedding labour. Steelmaker Corus is slashing 1,700 jobs in Teesside. Defence giant BAE is cutting back its workforce by another 640 as its order book suffers. City law firms could cut as many as another 5,000 employees as demand for business services shrinks. Even the Greater Manchester police force is sacking 300 officers after overspending its budget.
In short, there's plenty more job loss pain to go round. The fewer people in work, the less cash around to buy houses and repay loans.
2. Home loan approvals are still low
The second reason is home loan availability – or rather the lack of it. Housebuilder Bellway said last week that it expects half-year sales to be up 10% on last year. But the firm is still worried that potential home buyers can't get their hands on loan finance.
Last week's Bank of England figures showed that home loan growth is running at an annualised rate of less than 1%. OK, October saw a modest uptick in home loan approvals. But approvals are still 40% lower than their long-term, pre-credit crunch average. What's more, says Seema Shah at Capital Economics, they're 30% lower than the monthly level which history suggests is required for sustained house price rises.
3. Low interest rates won't last
A third reason to be wary is interest rates. Today's record low levels are helping millions of homeowners with their loan repayments – for now. But that's unlikely to last for too long.
As we discussed in the magazine last month, (Will the government bond market blow up?), rates are currently being kept down artificially. (If you're not already a subscriber, claim your first three issues free here.) Central banks are printing money and buying government bonds with it. That has pushed down yields on long-term bonds. This can't continue forever. When it stops, rates will rise again.
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Add this to the double whammy of rising job losses and lending curbs, and UK house prices could suffer a lot more damage. Why's that? Because when house prices were rising sharply, many homebuyers seriously overextended themselves. Their borrowings were much too high as a multiple of their incomes.
The only thing that's keeping them in their homes right now is the temporary reprieve granted by those record low rates. But as Jean-Pierre Husband at credit ratings agency Fitch notes, over two-thirds of UK borrowers are now on floating rate home loans (ones that change as underlying rates change, unlike fixed rates). That compares with under half in August 2008. "Their ability to service existing debt would be adversely affected by any hike in interest rates", he says.
In other words, higher loan costs would mean a big rise in borrowers falling behind with their repayments. That in turn would cause a surge in repossessions. And an extra dose of cut-price properties would then hit the market – and values, too. So far prices have only fallen by about 13% from their 2007 peak. But Fitch sees that drop extending by at least another 20%.
4. The supply of homes is set to surge
And finally, we come to the last big argument put up by housing bulls – that there's a 'lack of supply' which is keeping prices climbing. Clearly, even if there aren't many buyers around, if almost no one's selling, prices must rise.
But that too could be about to change in a big way. And not just because of rising repossessions – though that won't help. There's something on the horizon even more worrying for property bulls.
"There are big changes in the offing which could have a significant effect on the property market", says Lorna Bourke on Citywire. "The 'baby boomers' of the 1940s and 1950s are now reaching age 65 and coming up to retirement. Many intend to use their homes to subsidise this by selling up and downsizing".
Over 1.3m over-50s plan to cash in on their properties for retirement purposes, says new research from insurer LV=. This implies more than a million properties coming onto the market over the next few years. Many of these will be in upper price brackets where, supposedly, there's currently a shortage. So even if many of the 'downsizers' buy back into the market at cheaper price points, the amount of money about to be extracted from UK housing will be huge.
In a nutshell, this completely blows the 'lack of supply' case right out of the water.
Add this all up, and it's very hard to see how UK house prices can avoid falling into a long, and painful, decline.
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