House prices might already be through the roof, the ratio between average income and average house price might be at a near all time high, the recent surge in property prices might have fuelled over borrowing, leading to a sharp consumer slow down, but according to the president of the National Association of Estate Agents (NAEA), house prices could double over the next ten to fifteen years.
In fact, NAEA has rattled off a whole set of bullish points, detailing why the UK housing market is in rude health.
“House sales have increased by an astounding 40% since January #91;this year#93;, from an average of 10 sales to 14 per agent in March; this is a 16% rise on March 2005. This surge in the property market has been assisted by reported increases in house prices by 3.4% in February, alongside cheaper borrowing with fixed mortgage interest rates reported to be at 4.72% on average in February 2006 compared to a rate of 5.23% March 2005,” said a NAEA statement.
The NAEA went on to proclaim an 11.7% rise in the number of buyers in March and a 4.9% fall in the number of houses available. Even the species that other reports, warn could become extinct - the First Time Buyer - is apparently returning, with their share of the market jumping from 7.8%, to 8.9%. The Buy-to-let Market, says the (completely neutral and not at all biased) NAEA, is also seeing renewed interest. It says that individuals who are worried about their pensions are ploughing their money into property as an alternative form of investment
It’s president, Christopher Hall said, “In January I commented that I was confident average house prices would increase by up to 100% over the coming 10 to 15 years. Looking at the latest figures I believe we are still well on track for this.”
The NAEA report is at odds with other surveys doing the rounds. And whilst penning this article, gazing out the window to observe, gracefully in smooth flight, a flock of pigs, we wondered how this was possible.”
The viewpoint that the low rate of interest will mean that we are into a new paradigm, and mortgages owners can now afford bigger mortgages simply because the rate of interest is so low, does not take into account the downside to low inflation. Wages don’t rise like they used to, in the long term a mortgage for a given rate of interest is more expensive, than it used to be
As for the return of ‘first time buyers’, even the NAEA admitted that at just 8.9% of the overall market, their number is well below the normal average.
And just suppose rate of interest starts to rise again. As Capital Economics says “The speed and scale of the housing market slowdown in 2004H2, when base rates rose to just 4.75%, suggests that even a modest rise in interest rates would, as a minimum, act as a significant brake on house price inflation.”
In fact Ed Stansfield of Capital Economics said “Once we take affordability into account, the potential for house price growth to continue to outstrip average earnings growth, likely to be in the 4-5% year on year range, seems limited. Over the past 30 years, payments in the first year of a new mortgage have absorbed around 38% of take-home pay for a borrower on average earnings. At present, that figure stands at just over 43%. If mortgage rates were to remain at current levels, a doubling of house prices over the next 10 years would push first year payments to 56% of take home pay. If mortgage rates were just 100 basis points higher (i.e. 1%) on average than over the past decade, that figure would be 64%.”
Granted, this measure of affordability peaked at more than 68% in 1990Q1. However, since that was swiftly followed by a housing market crash, such comparisons provide little comfort. In addition, with inflation set to remain low, the real burden of mortgage payments will not fall back anything like as quickly as it did in the past. Some further acceleration in house price inflation over coming months cannot be ruled out. But, the combination of an overvalued market, higher interest rates and the fact that affordability is already stretched will prevent house prices rising by anything like 7% a year over the next 10 years.”
But there is another side. Recently we reported on how the City of London is pulling in highly qualified individuals from across the globe. With the Sarbanes-Oxley regulations in the US, introduced to avoid Enron style collapses, but in practice making the US Stock market a much less attractive place for an Initial Public Offering, London is apparently moving up the value chain, and the indigenous population can’t supply enough talent. This clearly does have implications for the housing market in London at least.”
Sources
HOUSING MARKET ZOOMING AHEAD IN FIRST QUARTER OF 2006 NAEA
London in 2015 - the centre of the global economy, or nowhere? Investment and Business News
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