The big three are done. The reports from the Halifax, Nationwide and Hometrack on the housing market in January are now all out. And the findings: well, Hometrack recorded a 0.3 per cent fall, Nationwide a small 0.1 per cent fall, and the Halifax had house prices flat. The conclusion from the big three: Hometrack is saying underlying prices continue to be supported by a tightening in supply of homes for sale, the Nationwide says there may be some tentative signs of bottoming out on the demand side, and the Halifax says sound economic fundamentals will support house prices in 2008.
So that seems pretty unanimous. The big three all agree things are tight, but are managing to maintain a vestige of optimism. They are, if you like, blowing bubbles of hope – or would it be better to say they are just blowing bubbles?
And yet, look a little deeper at the reports, and all of a sudden things don’t look so good.
Although the Halifax, for example, now has annual house price inflation standing at 4.5 per cent, prices over the last six months are actually down. Furthermore, most of the house price increases recorded by the Halifax over the last year, came in the first few months of 2007. It would take a fall of just 0.6 per cent over the next three months, and all of a sudden the annual index from Halifax would have turned negative.
But perhaps to get a better picture of what is going on, we need to drill down through the property chain.
In fairy tales, the book normally starts with the words “Once upon a time,” and finishes with “The end.” Well, this account of the housing market is to go in reverse order. For the recent reports published by the Nationwide and Halifax relate to the final stages in the house-buying process, the point where mortgages are approved. The Hometrack headline index looks a little earlier in the process, at the point where verbal offers are made.
But to get a feel of what is occurring beneath the surface, and understand the factors that are bubbling away which will determine the house price index in future months, we may be better off looking at factors such as asking prices, and then even earlier in the chain, the number of properties for sale on estate agents’ books and the number of new enquiries.
And here, the tale is altogether less rosy.
Rightmove, which reports on asking prices, had prices down 0.8 per cent in January and down by a stunning 3.2 per cent the month before. It has asking prices down to their lowest level since March last year.
But the real alarm is supplied by the Royal Institution of Chartered Surveyors (RICS). In fact RICS recently recorded the sharpest rise in properties for sale on estate agents’ books seen this decade. At the same time, it reported a rise in the number of new properties coming on to the market.
Hope comes in one nugget of data, but as ever with these things, because it is the only place where hope can be found, the property industry are trying to whoop it up.
The RICS index for measuring interest from new buyers improved. But, then again, while this index has improved, with a most-recent score of minus 25, it remains awful – so it is being optimistic to the point of naivety to pin much hope on that score.
The key, though, to what house prices will do during the remainder of the year lies in the following areas:
Firstly, what do buy-to-let investors do? Here, the Nationwide has some words of both hope and concern. “The most commonly expressed concern about buy-to-let is that the rental yield on property has in many cases fallen below the cost of finance,” it said. So that seems pretty damning. But then, its Senior Economist Martin Gahbauer added, “A property investor planning to hold the investment over a long period will benefit from future rental growth and is in a better position to ride out temporary periods of weak capital gains. Making some assumptions about future house price growth, interest rates, rental inflation, maintenance costs and void periods, it is possible to make a simple calculation of the total after-tax return an investor might experience under different investment horizons. Over the last thirty years – which includes several house price cycles – the compound annual growth in nominal house prices has been slightly over 9 per cent. However, under the much more conservative assumption that future house price growth averages only 3.5 per cent per year, a buy-to-let investor holding the property for the longer term could probably still expect reasonable after-tax returns. By contrast, the currently low level of rental yields means that an investor with a horizon of less than 5 years would realise fairly unsatisfactory returns unless house prices continued to rise strongly.”
Ummmm, So the next five years will not be good for property investment. If that is the case, presumably many investors will hold off making investments for the next five years, while some will even liquidise their present property assets. This could, of course, lead to a big jump in supply at a time of low demand – and we all know what the consequences of that will be.
But, perhaps, three other factors will be even more important. First: it will depend on these 1.4 million people due to be coming off fixed rate mortgages over the next 12 months.
Secondly, it will depend on the rate of interest, and whether the Bank of England feels inflationary pressures have relaxed sufficiently to allow big cuts in rates.
Finally, it will depend on the new attitude bankers have adopted to risk. The decision last week by Egg to cancel many of its customers’ credit cards is just the latest in a long line of examples of how banks have all of a sudden become more cautious.
It does smack, somewhat, of locking the stable door after the horse has bolted – but this is the way of economics. Perhaps one of the main causes of the business cycle lies with extreme reactions. It was like that with dotcoms in the late ’90s. One moment, investors saw them as the greatest thing since sliced bread, the next moment they wouldn’t touch them with a bargepole.
If just ten per cent of these 1.4 million people with mortgage resets find they can not get a good enough mortgage offer, and are left with no choice but to put their property on the market – there will be a massive injection of supply.
In parallel with this, if other consumers find they are no longer able to borrow in order to be able to pay off existing debts – then that could lead to a massive jump in property possessions. It is, of course, possible that none of this will happen. But it is clear there is a major risk of a crash in property prices.
You would have thought this risk alone would be enough to deter buy-to-let investors – which is why, whenever so-called experts try to talk-up house prices, they may be presenting themselves as the voice of calm and reason, but actually they’re doing little more than pumping air into a bubble.
It seems remarkable that the FSA runs roughshod over so many players in the investment industry – and yet seems to be totally blind to a systematic and industry-engrained tendency to talk-up house prices to a level that could ultimately unwind, creating very nasty pain in the process.
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