One of the features of the UK economy is the way that its performance is so often tied to house prices. This is mostly because in response to any slow down in the economy the Bank of England eases monetary policy which reduces mortgage rates and encourages people to buy. Buying a house does have tax advantages too as the first house is free of capital gains tax and buy to let investors are able to set the cost of the mortgage interest against their rental income, although last year that was restricted to only basic rate income tax. Next comes the view that as Yazz put it “The only way is up” for house prices which in most memories seems true as lets face it even in response to the credit crunch they did not fall far overall. That does not mean that some areas did not see heavy falls as Northern Ireland did but in general there was a dip but the bank subsidy called the Funding for Lending Scheme soon got things moving again in the summer of 2013. As so often we see an economic divergence where London and the South East boomed and other areas did less well and some saw falls.
This has led to a rather troubled situation in my opinion.
The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. ( Financial Times)
A clear danger is calling this value when we have relatively few transactions compared to the total stock and of course much fewer than before the credit crunch. We could hardly sell the lot at once! The same issues arise with this below.
As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016. ( Financial Times )
Next is the issue of divergence or some groups and areas doing better than others.
A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group. ( Financial Times).
“Store of wealth”? Again there is a problem as how could it be realised in total? Of course some do but the majority will not.
Ignored in all that is the issue of first-time buyers and those wanting to trade up who face properties which particularly in the South East are very expensive and in London are unaffordable even for high-flyers. Back on the 8th of December I offered this view.
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.
I do not wish for people to lose money but prices cannot just rise like a hot air balloon without hurting others.
This morning’s data release tells us this.
House prices in the three months to February were 1.7% higher than in the previous quarter; down from 2.3% in January. The annual rate of growth fell to 5.1% from January’s 5.7%, the lowest since July 2013.
So we see a fading of both quarterly and annual growth in house prices recorded by the Halifax. Here is some more perspective on that.
(This) was the lowest annual rate since July 2013 (4.6%). The annual rate is nearly half the 10.0% peak reached in March 2016.
It will be interesting to observe next month because house prices on this measure rose by 2% last March as I recall the dash to buy ahead of the changes in taxation for buy to let properties. If you want some real perspective on UK house prices over time then if 1983=100 they were 711.9 last month.
What about London?
This is an issue wider than the simple fact that I live there ( Battersea) but because it is usually the forerunner of what happens next elsewhere in the UK as effects from central London feed out to outer London and then the South-East and sometimes wider still. This caught my eye yesterday. From City AM.
Here’s an unusual move by a housebuilder: Barratt Homes has bundled together 172 flats at various developments across London and sold them off as rental homes.
The housebuilder said it had sold the units to Henderson Park for £140.5m. The portfolio includes 29 units at Aldgate Place, a joint venture with British Land, 25 in Fulham Riverside and all 118 at its Nine Elms Point tower in Vauxhall, a joint venture with L&Q.
Now if they were selling them at a regular rate they would be unlikely to be doing such a thing so there is an ominous hint for house prices here. Also that is a lot of flats to rent out which will presumably put pressure on rents received. It would be an irony would it not if the new Rental Equivalence measure of owner occupied housing costs in CPIH registered a fall?! Oh and speaking of sales there was this in City AM in January.
The housebuilder completed on 367 homes in London in the six months to the end of December, down from 842 in the same period the year before. Barratt said it was lowering prices and offering bulk deals to shift homes in the capital.
Meanwhile there is this from Savills blog.
However, despite much higher levels of outstanding debt in London, the equity held by those with a mortgage is also greater than in any other region, reflecting the capital’s high house price growth over the past decade. Just five years ago the average outstanding loan to value for a property subject to mortgage stood at 49 per cent in the capital. It now stands at 42 per cent, the lowest of any region.
What could go wrong?
Meanwhile elsewhere there are a very different set of problems. From the Savills blog.
This lack of equity is a very real constraint in some markets that have seen very weak house price growth over the past 10 years. For example, in markets such as Blackpool, Blackburn, Burnley and Middlesbrough outstanding loan to values exceed 70 per cent, making it difficult for those looking to move to take on more debt on competitive terms.
Here affordability is better but loan to values limit improvements to mortgage terms as we again wonder about the phrase some being more equal than others.
The basic trends seem locked in place. UK economic growth has been amazingly steady but the issue will come in the latter half of the year when we are hit by higher inflation levels. These days what was previously regarded as relatively low inflation ( 3%+ on CPI and 4%+ on RPI) has a larger impact because so far on the credit crunch wage growth has not risen with it so we saw a sharp fall in real wages around 2011 for example. It is not impossible that the Bank of England could cut Bank Rate again or produce other house price and bank friendly measures but even they may balk at that with inflation above target. Thus house price growth looks set to fade and the price falls will spread out from Central London. How far across the country they will go depends on the mix between economic growth that 2017 and 18 deliver to us.
It is a welcome development that a woman has been promoted to the higher echelons of the Bank of England. However this particular one has not had a good start as Deputy Governor due to her apparent amnesia about her brother’s job at Barclays.
Regrettably, my oversight means that my oral evidence to the Committee in this respect was not accurate. I write now to correct that evidence at the earliest opportunity and to place on record my sincere apologies to the Committee.
Here is a link to her full apology.