The UK looks on course for some house price falls

As ever there is plenty of news about the UK housing market around but let us start with a consequence of government action which led to this reported by the BBC at the end of last week.

The boss of house building firm Persimmon has walked off in the middle of a BBC interview after being asked about his £75m bonus.

“I’d rather not talk about that,” Jeff Fairburn said, when asked if he had regrets about last year’s payout.

The £75m, which was reduced from £100m after a public outcry, is believed to be the largest by a listed UK firm.

The BBC even provides a pretty good explanation of why this is a hot topic.

A combination of rising house prices, low interest rates enabling people to borrow more cheaply and government incentive schemes have been credited with driving all housebuilder shares higher.

In particular we find ourselves looking at a bonus scheme set at £4 compared to a payout based on one of £24 in case you wonder how we got to such an eye watering amount. But the real problem is that Help To Buy provided what is called in economic theory excess profits for housebuilders. We have looked before at how it helped them to make high profits on the sale of each house and it also boosted volumes in a double whammy effect. So in turned into help for housebuilders profits and bonuses. Sadly it also showed the weakness of shareholders these days as only 48.5% of Persimmon shareholders voted against this at their annual general meeting, which begs the question of what would be enough greed to provoke a shareholder revolt.

What about now?

Here is the result of the latest Markit Household Finances survey.

UK households are generally projecting higher
house prices over the forthcoming 12 months in
October, but the degree of optimism regarding
property values dipped to the lowest since the
immediate aftermath of the EU referendum in July

Sadly for Markit recorded time seems to have started in July  2016 because if we look back we see some interesting developments. For example the reading in early 2014 at around 75 was the highest in that series. This means that those surveyed not only realised the UK economy was picking up but seemingly had figured out the determination of the Bank of England and UK government to drive house prices higher.

Also another piece of news hints at a change. From Financial Reporter.

The proportion of homes in England and Wales bought with cash fell to 29.6% in H1 2018, according to Hamptons International, the lowest figure since its records began in 2007.

In H1 2007, 33.6% of homes were purchased with cash, peaking in H2 2008 at 37.8%.

In H1 2018, 113,490 homes were cash purchases, totalling £25.3 billion in value according to Land Registry – the lowest level in five years and a drop of 21% compared to H1 2017.

You may not be heartbroken at the main reason why.

Hamptons International says the downward trend in the proportion of homes bought with cash reflects a drop off in investor and developer purchases. Countrywide data shows that in H1 2018 investors accounted for 24% of cash purchases, down from 32% in H1 2007 and a peak of 43% in H1 2008.

The same goes for developers who purchased just 2% of the homes bought with cash in H1 2018, down from 6% in H1 2007.

What about the house price indices?

The official data released last Wednesday told us this.

Average house prices in the UK have increased by 3.2% in the year to August 2018 (down from 3.4% in July 2018), remaining broadly stable at a national level since April 2018 .

So a welcome slowing from the period where annual growth remained about 5%. But the truth is that a lot of the change is represented by one place.

 The lowest annual growth was in London, where prices decreased by 0.2% over the year, down from being unchanged (0.0%) in the year to July 2018.

London has affected the area around it to some extent as well but much of the rest of the country has carried on regardless.

A somewhat different picture was provided on Friday by LSL Acadata.

At the end of September, annual house price growth stood at 0.9%, which is the lowest rate seen since April 2012, some
six and a half years ago.

They take the Land Registry data of which 35% is available now and have a model to project that as if 100% was in. They then update the numbers as for example around 80% should now be in for August. So taking what should be, model permitting, the latest data shows a much clearer turn in the market and they expect more.

Our latest outlook for the 2018 housing market suggests that the annual rate of house price growth will be in negative territory by the end of the year.

One reason for that is simply the trend is your friend.

This was the sixth month out of the last seven in which monthly rates have fallen, with the combined decline since February totalling some -2.0%. The average house price in England & Wales now stands at £302,626. This price is already some £2,240, or 0.7%, below the level of £304,866 seen last December, meaning that it will take a number of months of house price increases to make up this shortfall.

Also they point out that this has taken place in spite of the economic environment still being very house price friendly.

All this comes at a time when interest rates are at almost historic lows, mortgage supply is good, the number of people in work is higher than a year earlier, and average weekly earnings have increased by 2.4%, on a year-on-year basis. The housing market should be booming.

They would be even more bullish if they realised wage growth was 2.7% rather than 2.4%. There is also an element of “reality was once a friend of mine” below as we wonder what it would take for them to notice that this has been happening for some time?

While current initiatives (Help-to-Buy and Stamp
Duty relief) have relatively minimal overall effect on prices, as government continues to ratchet up the initiatives, the
risk is that these in turn could simply add to the affordability problem by causing prices to rise

This has particularly affected younger people which they do seem to have noted.

highlighted the falls in home ownership amongst 25-34-year-olds over the last 20 years, despite endless government initiatives to rectify the situation. As the report notes “Since 1997, the average property price in England has risen by 173% after adjusting for inflation, and by 253% in London. This compares with increases in real incomes of 25- to 34-year-olds of only 19% and in (real) rents of 38%.”

Some night think that raising prices some 173% above inflation was quite enough to cause an affordability problem!


UK house prices have proved to be very resilient and I mean that in the commonly used version of its meaning, not the central banking one. I thought that the real wage decline in 2017 would send annual growth negative but so far it has resisted that. However the LSL data set suggests it may finally be quite near.

As ever the danger is of the UK establishment panicking just like they did in 2012/3 and pumping it up, one more time. Or as LSL Acadata put it.

Announcements on Help-to-Buy, Starter Homes and possibly a Rent-to-Own programme based around giving CGT relief to landlords have all been mooted.

Personally I think we have had way too many announcements and initiatives which via windfalls to existing house owners and especially house builders have made the situation worse rather than better. For now the Bank of England at least seems stymied but of course this is the one area where they can be both inventive and innovative.




25 thoughts on “The UK looks on course for some house price falls

  1. The people I work with are still absolutely convinced prices will not fall, at least not by much as Carney will never put up rates by anything that would threaten the housing market and also the sheer demand keeping a floor under prices.

    Several have moved recently, taking on bigger mortgages, one in his early fifties and mortgage free has moved and bought a £400,000 semi requiring a £50,000 mortgage to finance, and he is talking about putting an extension over the garage for another £50,000, and points out he is getting no interest on his money in the building society so may as well put it in property as it is safe and is going to go up in value -right???

    Another with a £300,000 mortgage and up to his ears in credit card debts, just laughs and keeps switching his balance to a new card issuer who gives the next 0% deal, recently sent me an article detailing how much savers have lost over the last ten years due to the Bank of England’s ZIRP. He was told by the estate agent who sold him the house(2 years ago) that prices will go up around 7%p.a over the next ten years or so(therefore doubling -rule of 72), and so far he has been proved right. He is also convinced interest rates will never go up and who can blame him??? He expects his house when it is paid off to be worth in excess of £1m.

    If they went up by 2%(which is as much as Carney would dare to if his hand were forced) all of those people would be totally blase about it, as their payments would still be easily affordable.

    The only thing(barring WWIII) I believe would result in big falls is if Labour get in(BREXIT sabotage plan D) and the inevitable run on the pound that would follow, forces Carney’s hand(if he’s still around) but I expect the increases to be painfully slow and lag the falls in the £, and again limited by the desire to protect the housing market at all costs.

    • It depends where you are. A quick look on Rightmove for any town in the South East will show up a lot of reductions. A quick look at sold prices for London and South East will show prices are falling and have been for some time.

      • ONe of the debt monkeys mentioned aboved boasted he could re-finance his fixed 5 year mortgage at 1.9%.
        Without using expletives, how in gods name can a central bank justify rates as low as that after almost ten years of asset price inflation??????????????

  2. Shaun, of course but you use the wrong words. The FT was admitting this last week in the words of the establishment: “House Price Growth falls to its lowest level in 5 years”

    Don’t worry, we still got the words Price and Growth in there. 🙂

    Of course I think Govt would love for for prices to kind of hang, suspended in a steady state so the spin could be massaged around a “stabilisation meme”. However, once you regognise the trend upwards as a bubble then there are in reality only two courses.

    1) Feed the bubble
    2) Don’t feed it and watch it deflate

    There are no other choices. I am sure that the other commenters will propose ways to feed it either in demand of through shortages. We could knock down a lot of rubbish 1970’s and 1980’s buildings…?

    Paul C.

    • Hi Paul C

      You may have read about the person killed (by drug dealers I believe) in Battersea last Wednesday evening. As it is near to Battersea Park Tescos I know the area fairly well and whilst a fair bit of it is modernish I cannot help but feel knocking down some buildings might help there. The place is too enclosed in parts giving the opportunity for dealers to thrive.

      As to the house price bubble I have been surprised that it has not begun to deflate more quickly and can only think that they delay is a sort of denial.

      • Hi Shaun, You find that the few new developments where place and purpose are included in housing development are included then security are factored however most older and indeed current new builds are “piecemeal” and layered atop neglible big picture thinking so these “bad” outcomes are baked in. Sad isnt it.

  3. I’d treat the Hamptons analysis of cash sale volumes with extreme caution. They are comparing H1 2018 with other periods before all the data for H1 2018 is in!
    You outline the lag issue when describing the Acadata projection methodology for coping with the low counts of registered sales in most recent periods. Clearly Hamptons have no such methodology which is why their comparisons of H1 2018 to other periods are meaningless.
    I took ONS and others to task on this issue last week.
    I’ll Tweet some charts that help explain

  4. House prices have indeed proved resilient mainly through: low interest rates; specific programmes and easy credit.

    The first you could quite reasonably argue was not targeted at house prices specifically but were a collateral effect of low interest rates designed to keep us spending generally but benefiting asset prices as well.

    The specific programmes such as Help to Buy had the result of stoking the market and, in my view, simply cannot be justified; they were called a “moronic” policy by one commentator and that sums it up; it is simply pumping up demand in a market where there was already too much demand. These are errors which were unforced and unforgivable.

    Easy credit is the third reason and this is down to the banks pushing it as ever and increasing their leverage. The government did institute MMR which has reined things back slightly but lenders will try to circumvent any regulation they think will cramp their style.

    Market based adjustment mechanisms are probably the best way to regulate the housing market and the interest rate is one powerful way that has done this in the past. The problem is we have rates which are too low for assets but not for spending. The (unobservable) neutral rate of interest is going down not up due to the increase in debt; if the BOE were to put up rates even by 1 or 2 % this might well bring the housing market to heal but it might also induce a recession which means everyone loses.

    Whatever policy has done or not done in the last few years it has not abolished the economic cycle and, sooner or later, we will have a recession which will force sales by the (many) over leveraged and result in falls in prices. Between around 1990 – 1996 prices fell in real terms by around 30% being 15% nominal falls and 15% inflation. It can happen and probably will as I think the argument that “we need to build more houses” is wrong and this will not rescue the market.

    • Unless this is THE reset with the introduction of the new monetary system, I cannot see the central banks pulling the plug and therefore will do everything to prevent a meaningful drop in prices.

      • I think they can now do very little to prevent a drop; rates are far too low. Also, does anyone now believe in the “wealth effect”? This was the rationale for high prices a few years ago;it’s nonsense.

        Also, and more fundamentally, I don’t think low rates persist because of house prices; they persist because of the general debt burden and need to be low to support GDP; the “neutral” rate of interest is getting lower because of the debt burden generally not to support house prices; higher rates would precipitate a recession.

        To talk in terms of the main object of policy is to encourage high house prices is simply wrong; they are a collateral effect not a reason.

        • Since the mortgage market represents the vast majority of this debt and if you were referring to any country in the world other than the UK I would agree, but the people in this country have now beocme so conditioned by decades of such monetary policies to believe house price appreciation is as certain as the sun rising tomorrow morning that the housing market now dominates government and Bank of England economic policy, and therefore the wealth effect via house price inflation to a normal logical person is nonsense, but to the average Brit it is the route to guaranteed riches.

          The degree of indebtedness due to people gambling on the “can’t lose ” housing bubble and those merely extending themselves hopelessly beyond the point where if rates returned to anything like normal levels, they would be homeless, means the government and the Bank of England are now trapped, and cannot even allow a small correction to house prices to occur.

          • Kevin

            You seem to be saying that IR policy is driven by house prices. I think this is wrong.

            Only one third of houses are subject to a mortgage and of those many will be on fixed rates extending for some time into the future so will not be immediately affected by IR increases. I suspect that the BOE would be far more concerned with banks solvency ratios than anything else if prices fell but there have been stress tests..

            If IRs did increase then it would affect all lending that is subject to rate changes. It would affect car leases; capital purchases and all credit card debt as well as mortgages on variable rates; the effect is far more widespread and could tip the economy into recession via the effects on spending.

            What I’m saying is that folk think that prices will never be allowed to fall but they did fall significantly only twenty years ago and with interest rates so low they cannot be cut further if the market does fall and there is not a great deal that can be done about it apart from nonsense such as HtB (but that is recognised now to be nonsense).

            I know people think a lot of things about the housing market but many are simply not true.

    • Will see if the House Price bubble blowing party are going to deflate it next week in the budget, i very much doubt theyll try and win several million more votes instead preferring to win the Home Counties seats with the help of the ever diminishing number of boomers who’ve had 20 years of free money given to them.

    • I gotcha now… the rising house prices are stopping new entrants getting a foothold… and they are starrting to think about voting against the current Govt… yes could be Corbyn or other.

      • Its not a case of starting to think that way, the under 50s voted for him over the Tory party last time out, in 2022 it’ll be the under 55s.

        The decision by the BoE and LIBCON party to reinflate the housing bubble with Funding for Lending and Help to Buy is coming home to roost.It may have won them the 2015 election but could wipe them out for a generation.

  5. 25-34-y-o.
    20 years ago most young people had finished their education in their teens, and had 6 years in the workplace prior to reaching this portion of the demographic.
    Now most young people are in ft education until 22, leaving them three years, one of which may well be a gap year, before reaching the milestone.
    To suggest that it is only big-bad builders and their obsequious political servants to blame, is nonsense, although they are a problem.
    To be more realistic, we should probably either compare the present’s 25-34-y-o with the 20-29-y-o of 20 years ago, or the 25-34-y-o of then, to the 30-39-y-o of now.

    • Hi therrawbuzzin

      You are right to point out that people are joining the workforce at a later age meaning that their ability to buy a house will be delayed. We can add to that the student loan factor which according to the House of Commons library in July is of this sort of scale.

      “The average debt among the first major cohort of post-2012 students to become liable for repayment was £32,000.”

      So maybe you need to add another couple of years or so to your estimates.

  6. The Bank treats purchases made by overseas investors as ‘cash’ on the basis that it does not impact ‘their’ banks. I have a horrible feeling though that UK financial service companies have been trailing around with the builders on their Far East roadshows, so we’ll see how much is really cash.

    But my basic point is that it seems that Far East purchases (incl. China) have dropped off. It is affecting all global city markets that were driven by the same capital flow.

    • On another note I see Jaguar-Landrover are shutting down for two weeks (siting reduced demand from China)

      Maybe th3e correction is starting globally

        • Everyone is maxed out on credit (debt), negative rates coming to try force those (few) who have any cash left to spend it in a vein effort to get the economy moving again

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