House prices up by 8.4%
The last time I wrote about the UK housing market, back in 2012, average prices had fallen for three out of the previous four quarters, and confidence in the market had hit rock bottom. Indeed, the last time house prices rose consistently for all four quarters was back in 2007 – just before the bubble burst. When it did burst, most analysts agreed that, whatever the causes, the housing market needed to go through a substantial re-adjustment, given the bubble had pushed up house prices to unsustainable levels, with affordability falling to an all-time low. Between 2007 and 2013, the housing market flat-lined, with occasional signs of life being quickly snubbed out as confidence plunged and the economy approached a triple-dip recession. Today, with positive GDP growth and rising confidence, as witnessed by the highest level of mortgage approvals in six years, it is not surprising that the latest bundle of figures indicates a market in the early stages of take-off, with headline housing inflation rates of 2.7% in the last quarter of 2013 (the highest since 2009), and an annual rate of 7.1.% (the highest annual rate since 2007), with annual prices rising by 8.4% in the 12 months to December. Geographically, Manchester, London and Brighton topped the regional markets, with an average inflation of 21% and 14.9% and 12% respectively. Perhaps it is time to reconsider some of the lessons learnt in the last boom.
According to Kate Barker of the Bank of England, higher demand and shortage of supply are the fundamental reasons for the long-term upward trend in house prices. In the previous bubble, lower nominal rates created a considerable ‘front-loading’ effect, so that individuals found it much easier to pay at the start of taking up a new mortgage – hence, new buyers were attracted into the market. With employment prospects looking good, the effect is amplified. Affordability in an era of low interest rates is really an issue of getting enough to pay a deposit, rather than of long term affordability in terms of meeting repayments. On top of this, then, as now, real interest rates had also fallen to historically low levels, with inflation running ahead of nominal rates. Research suggested that real interest rates had fallen from around 4% in the 1990s to 2% in recent years. In addition, the slow growth in supply relative to demand had a major role to play - estimates suggest that around 190000 new houses needed to be built per year to constrain inflation – on average only 135000 new house were built per year in the 2000’s. The final element, according to the Bank of England, appeared to be the ongoing preference for housing as an alternative investment to other assets.
Of course, all of these fundamental conditions are still in place, so any upturn in confidence – which we are now experiencing - is likely to be converted very quickly into house price inflation. If we add in the, albeit modest, effect of the government’s Help to Buy scheme, which has attracted some 6,000 borrowers since it was launched in October 2013, then conditions are now right for a price surge.
However, as always, we need to keep things in perspective. According to the Council for Mortgage Lenders chief economist, Bob Pannell, "Gross mortgage lending for 2013 looks set to reach £170 billion - higher than the £156 billion we originally forecast, but still a far cry from the £363 billion experienced at the height of the lending boom in 2007 and …. the next two years are unlikely to see lending levels getting very far above £200 billion a year." So what we can conclude is that, without any specific intervention, house prices are likely to increase by in excess of 5% for at least the next couple of years. Whether these rates are too worrisome for the Bank of England remains to be seen.