What are the prospects for UK house prices?

This year has the potential to be one where there are ch-ch-changes in the UK housing market. What I mean by that is that the rise in house prices looks set to fade and be replaced by house price falls. Even the estate agent sector has shifted to suggesting only minor price increases and of course they have a large moral hazard of never being keen to forecast price declines! Back on November 4th last year I offered a critique of this as Savills told us this.

London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.

They were telling us this in my opinion because otherwise the forecast below would not do business much good.

Savills said (house) prices would be flat in 2017 in the capital and elsewhere…

Actually as I pointed out on the 8th of December house prices in central London had already gone from the only way is up to fallin’.

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.

I plan to cycle past the large Nine Elms development later which stretches from Battersea Dogs Home to Vauxhall and includes the new American and Dutch embassies and it will provide food for further thought. I would like to know for example the exact numbers behind this being reported by the Foxtons estate agency.

Property prices in Nine Elms have increased by 3.58% over the past year.

Should someone want to take the advice of Blur below there are also challenges ahead.

City dweller, successful fella
Thought to himself oops I’ve got a lot of money
I’m caught in a rat race terminally………….

He lives in a house, a very big house in the country

That plan seems to have trouble ahead if this from KnightFrank is any guide.

Prime country property values fell by 0.4% between October and December, the third consecutive quarter in which prices have fallen……As a result values ended 2016 marginally lower, falling by around 0.4% on average compared with the 12 months to December 2015.

Will this spread wider?

I think so although there are different issues as we move from prices which are in effect set internationally these days to ones which are much more domestic.

Inflation and hence real wages

The likely trend for real wages is down this year and that will pose its own problems for house prices and affordability. We got quite a strong hint from Germany yesterday as shown below from Destatis.

The inflation rate in Germany as measured by the consumer price index is expected to be 1.7% in December 2016. Compared with November 2016, consumer prices are expected to increase by 0.7%.

As you can see there was quite a pick-up and whilst there are domestic issues the international ones will be stronger for the UK because the UK Pound fell against the Euro overall last year. Accordingly unless wages can increase we will see real wage falls in 2017 in the UK putting a squeeze on budgets.

Mortgage Rates

Last year we one of record lows for mortgage rates in the UK as the Bank of England under Governor Carney added further to the measures reducing them. The ongoing £60 bank mortgage lending subsidy called the Funding for Lending Scheme (FLS) found itself accompanied by a 0.25% Bank Rate cut, an extra £60 billion of QE ( Quantitative Easing) and some corporate bond QE. Thus Mark Carney and his colleagues had a go at emptying the house price support cupboard. Actually they also added the Term Funding Scheme to give another bank subsidy which so far has provided some £20.7 billion to them.

But the winds of change have blown as we note the international trend to higher bond yields and hence mortgage rates. This has been led by the impact of the expected policies of President-Elect Trump and the December interest-rate rise of the US Federal Reserve. As ever the short-term picture is complex as a bond market rally at the end of 2016 was followed by falls this week but the UK ten-year Gilt yield was driven down to nearly 0.5% by the “Sledgehammer” of the Bank of England is now 1.32% which gives the bigger picture of rises. Also it means that our “dedicated follower of fashion” Mark Carney picked an out of date line.

Government policy

This has shifted in a couple of ways. Firstly we saw changes in Stamp Duty on second homes then we saw changes in affordability criteria for buy-to-let mortgages. In April we will see tax relief on mortgage interest payments reduced to being only at the basic rate as well. More generally much of the Help To Buy policy ended with 2016.

We do not know how the new government would respond to house price falls but so far it does not seem as obsessed with the housing market as its predecessor.

Starter Homes

One area where the current government is following past policy is in the rehash and reannouncement of the Starter Homes policy and the announcement of the new Garden Villages. The simple truth is that governments of all types in the UK have made loads of similar proclamations but very little extra building if any has actually taken place.

Today’s data

The latest Bank of England numbers show that the market is trying to hang on in there.

The number of loan approvals for house purchase was 67,505 in November, compared to the average of 64,178 over the previous six months…….Lending secured on dwellings increased by £3.2 billion in November, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 3.0% and 3.1% respectively

That would not be far off a steady as she goes position if we missed that this was for November and so the main changes are still in the future.

Unsecured credit

Here we find yet another side-effect of the housing friendly policies of the Bank of England. Please do not adjust your sets and I hope you are sitting comfortably.

Consumer credit increased by £1.9 billion in November, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 11.4% and 10.8% respectively.

This is a clear consequence of the Bank of England opening the monetary taps and in the past has led us into trouble. We do not get a breakdown of what the lending if for but I believe a lot of it goes into the record numbers for motor car registrations. Although I do recall the claim a while back that this was in fact secured credit. An odd description where the first drive alone is accompanied by a boot full of depreciation.

Comment

We see that it is not just the weather which is producing some chill winds right now as the outlook for the housing market is the same. Not perhaps the plummet predicted by our £30,000 a speech former Chancellor but a fading then stagnation then fall. Even the Consumer Price Index is likely to exceed house price growth this year.

However I am someone who would welcome a phase of mild house price falls. Why? Well the official house price series explains as I note that an average house price of £150,633 in January 2005 was replaced by one of £216,674 last October. There are of course many regional differences with Central London leading and Northern Ireland lagging but overall we see an asset price which has completely decoupled from the real economy. Of course this is Bank of England policy and an area where I strongly disagree with them. Actually as this from Mark Carney implies they are trying to have their cake and eat it.

Moreover, rising real house prices between the mid-1990s and the late 2000s has created a growing disparity between older home owners and younger renters.

Why have you pushed them further up then Mark?