What is happening to UK house prices and rents?

Now we are a few months down the road from the vote in the UK to leave the EU we can take a look at the state of play in the housing market. For example is it on its way to an 18% drop in house prices as suggested by the former Chancellor George Osborne? Or was that forecast one of the reasons he is now a former Chancellor? Of course if so that begs a question as to how he can be earning circa £30,000 a speech. One thing we do know is that the Bank of England under the Governorship of Mark Carney did its best in August to keep the home fires burning.

This package comprises:  a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.

I suppose the purchases of corporate bonds are the one feature which did not help house prices, especially the frankly bizarre purchases of the bonds of foreign companies. But the rest was very house price friendly and we were also promised “more” by Governor Carney although he now tells us that he meant “more” in a “less” sort of way in the same fashion that his Forward Guidance of higher interest-rates turned into a cut in reality.

Where are we now?

The Royal Institute of Chartered Surveyors or RICS has reported this morning.

The headline RICS price balance came in at 30% in November, it’s highest reading since April, with more respondents in most areas seeing some increase rather than a decrease. For the second consecutive month, the strongest growth was reported in the West Midlands and North West of England.

An interesting regional picture, do readers agree? Looking ahead we are told this.

The near term outlook for prices remains broadly similar to October with a net balance of 14% of surveyors expecting an increase over the coming three months, and some growth expected across most parts of the UK.

There is of course something of a moral hazard in looking at surveyors views which I think is highlighted below.

However, the largest proportion (63%) think that prices are currently around fair value. The South East contains the largest proportion (58%) of contributors who take the view that prices are above fair value at present.

Only 58% think house prices are too high in the South East?

Halifax

The Halifax house price report was released yesterday although these days it is under the Markit banner and it told us this.

“House prices in the three months to November were 0.8% higher than in the previous quarter. This increase followed little movement in prices on this quarterly measure in both September and October. The annual rate of growth also increased, rising for the first time for eight months, from 5.2% in October to 6.0%.

So we see little sign of an 18% drop although we have seen a slowing in the annual rate of house price inflation from 10%. However an annual rate of 6% is still well above both ordinary inflation and is around treble growth in average earnings. So whilst we do not have the data for the earnings to house price ratio I can see on the chart provided that we are at 2006/07 levels which were supposed to be unaffordable weren’t they? Of course interest-rates are much lower now but we have also have seen real wages fall and not fully recover.

What about rents?

The official view is that the growth in rents has been slow. For example here are the latest numbers which are similar to wage growth.

Private rental prices paid by tenants in Great Britain rose by 2.3% in the 12 months to October 2016; this is unchanged compared with the year to September 2016.

As growth in rents has been much slower than house prices the UK establishment is desperate to put the former in its consumer inflation numbers. However whilst there are obvious issues with any definition of poverty this from the Joseph Rowntree Trust poses a challenge to the establishment complacency.

The number of private renters in poverty has doubled over the last decade. There are now as many private renters in poverty as social renters. Rent accounts for at least a third of income for more than 70% of private renters in poverty.

Whilst there may be a variety of causes these are worrying numbers for a recovery although they do only take us to 2014/15.

In 2010/11, the number of landlord evictions and mortgage repossessions were both around 23,000. In 2015/16, there were 37,000 landlord evictions and 3,300 mortgage repossessions. 58,000 households were accepted as homeless in 2015/16, an increase of almost 50% compared with five years earlier. The most common cause of homelessness is the end of a shorthold tenancy or rent arrears.

There is also a concluding sentence with which I can only say “Hear! Hear!”

What about London?

The Guardian reported this yesterday.

On Monday, property firm Knight Frank said prices in prime London postcodes had fallen by 4.8% in the year to November, and were set to end the year 6% down. In Chelsea, prices have dropped by 12.6% over the past year, it said, while around Hyde Park values are down by 11.2%. It forecast that across the market prices will remain flat in 2017.

An estate agent saying prices will be flat? With the obvious moral hazard in play that sounds like a fall to me. Volumes have also fallen but I note that the Guardian numbers have been challenged by Henry Pryor on Today on Radio 4 earlier. He says that one company sold 9 new-builds above £5 million as opposed to that being the total. He also argues that prices have been falling for a while.

Some agents suggest prices in parts of London have fallen 35% below their peak levels of 2014 but these are perhaps exceptions…At the very top of the central London market homes where homes cost over £5 million prices are down 11% on 2015 & 19% on 2014 levels.

If there is a trickle-down effect then it is in play right now. Although care is needed as of course these prices rose into the stratosphere and if you like we are reversing the recent pattern of Monte Paschi.

Comment

If we look for ch-ch-changes we see the clearest signs of a change is gonna come in London. Volumes have dropped and as we note that prices were falling at the top end anyway it is clear that “the only way is up baby” has been replaced on the record turntable by “Fallin'” as Alicia Keys moves Yazz on. As this has strong international influences we wait to see how they play out as existing owners have lost out from the lower UK Pound £ but new buyers can buy more cheaply. With real wages coming under pressure from higher inflation and therefore likely to fall in 2017 we should see national house price growth slow and maybe even a fall or two. That’s the best piece of new first time buyers have seen for quite some time.

As to rents I do not change my view from November 4th.

As we look forwards the UK is so far doing okay for economic growth (0.4% to 0.5% per quarter on the evidence so far) but I expect a rise in inflation in 2017 which is more likely to subtract from that via its effect on real incomes than add to it. We know that lower real incomes are correlated and usually strongly correlated with rents which means that a reduction in the rises and maybe some falls are on the horizon (2019 or so if my logic holds).

Perhaps that is why they are putting imputed rents in the headline consumer inflation number from next March! Although with the establishments record on Forward Guidance maybe not…

 

 

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14 thoughts on “What is happening to UK house prices and rents?

  1. The most surprising thing here is that anyone would pay £30,000 to hear George Osborne speak. I suppose that it is all part of the merry-go-round, with politicians giving out knighthoods to its city chums and the city chums pay them back in cash.

  2. Only 58% think house prices are too high in the South East?

    about the 2/3rd who would like to buy a house in the SE but cant afford to due to unrecorded asset inflation

    forbin

    the other 1/3rd obviously must be landlords and multiple house owners looking for profit

    • Hi Forbin

      Whilst there are a lot of landlords about they must be a long way short of the 42% required. I would like to have a breakdown of what the 42% thought though, for example did anyone think they were too low?!

  3. Is there something more going on behind that ‘frankly bizarre’ purchase of foreign company bonds…? I wondered in all the noise about ECB changing something recently so that they could buy corporate bonds or something, if it was just another way of excluding Britain (despite us stumping up fees/Tony Blair’s please-please-make-me-eu-president-have-some-taxpayers-money-eu-funding-escalator&rebate de-escalator)
    – Oh look, eligible areas for purchase – http://www.bankofengland.co.uk/publications/Pages/news/2016/068.aspx
    a quarter is electricity companies, then there are water, gas – strangely enough all areas where we have opened up our services sector, one of the supposed pillars of the eu that are so sacrosanct, but… the French haven’t. Oh, and I bet with names like EDF that a pretty large amount of those are German or French. Funny how the pillars aren’t so sacrosanct after all when we want to sell insurance or buy service companies over there – but I literally don’t recall one word about it on the BBC, even through the entire Brexit debate, so I guess this pillar thing isn’t really that important after all. Oh look, an article from 2014 says

    “..But foreign ownership of UK firms is increasing. From 2000 to 2007, in the manufacturing sector and measured in terms of output, foreign ownership rose from 25 to 40 per cent. Among larger companies, it is now between 70 and 80 per cent: 2,000 firms taken into foreign ownership in one decade. I see no sign it has slowed. In mining and quarrying in 2007, 70 per cent were foreign owned; in utilities, it was 50 per cent and is now much higher. Our next generation of nuclear power stations will also be decided overseas”
    Strange, as I’m sure I read EDF with questions about dodgy nuclear power designs (thanks Theresa for guaranteeing and overpaying for those) were facing possibility of bankruptcy. Still, I’m sure the clever chaps at the BOE aren’t buying any of their shares.
    It’s a good job they can’t just re-lend the money outside UK..ooh, hang on – (from Daily Mail)
    “…Take Scottish Power, now owned by Spanish firm Iberdrola. Last year, after a series of price increases, it announced its customers would have to pay yet more for their gas. Scottish consumers were furious: in five years, their energy bills had risen by an average of 40 per cent.

    So you can imagine the reaction when, just weeks after the latest hike, it emerged that Scottish Power had piled up vast profits. So much so, that it had made an £800 million loan to a sister company in the U.S.

    This was not illegal. A utility company with an international reach can transfer profits from one part of the world to another rather than reinvest them in infrastructure, service and lower prices in the host country”.
    Sorry for all the cutting/pasting.

    • Hi Nicodemus and welcome to my corner of the web.

      There are many problems here as you highlight. Another is that corporate bond buying for purish UK corporates was always going to be a problem because of the (lack of ) size of the £ denominated market. Many of our businesses issue in Dollars and Euros.

      It has been discussed on here that Governor Carney is a “dedicated follower of fashion” and so we got UK corporate bond QE. To what end I am not sure…

    • If our government can’t /won’t make us self-sufficient (to protect us from price rises if nothing else) then we’re all going to have to make ourselves as self-sufficient as possible individually eg with solar panels etc and go off-grid as much as we can.

  4. Great blog as always, Shaun.
    As you say, the ONS is putting CPIH in as its headline number next March to give rents a greater impact on measured inflation. You and some of the readers of this blog may be interested in knowing that the the ONS quarterly owner-occupied housing price series based on the net acquisitions approach, originally scheduled for publication yesterday, will be published È on Tuesday 13 December to coincide with the UK Consumer Price Inflation Bulletin, in line with the planned theme days for 2017”. It is called OOHPI by Eurostat to indicate it is THE OOH price series for their purposes, but the ONS calls it OOH(NA). It may not be the OOH(NA) series most people would like, but it is better than OOH(RE), and ONS does intend to improve it.
    By the way, soon to be ex-US Vice President Joe Biden is here in Ottawa today and tomorrow on business. Hard to fathom why he would have been invited, just weeks away from Mike Pence being sworn in as his successor.

    • Hi Andrew and thanks

      I am indeed unhappy about the way the OOH (NA) measure has turned out but am completely in agreement that it is better than using imputed rents. As to the song it is one of my favourites, Green Day were really on form when they made that album 🙂

  5. A new way to attack pensions!
    All those, dismayed by annuity levels, who withdrew pension pots (some of the paying quite a bit of tax) to invest in BtL, now see those returns under threat, as inflation threatens to erode them.

    I know that most BtLers are parasites, but some are just pensioners seeking to make a living, perhaps with one flat for rent outside the SE.

  6. as for former Chancellor George Osborne………………

    Politicians and diapers must be changed often, and for the same reason.

    Mark Twain

  7. Anecdotally I hear that expensive London homes are just not selling. Apparently the Russian and Chinese buyers, which sent the market into orbit, have dried up. There is still an awful lot of renovation and basement digging going on in central London. I wonder if many people are choosing to expand what they have rather than buy something bigger. The changes to stamp duty are probably having an effect here by driving up transaction costs.

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