A Personal View on UK Houseprices

 About a year ago, I recall being cornered at a party by friends of my wife urging me to buy a property. It’s cheaper than renting, you’re bound to make money etc etc. All had bought property recently and I tried to argue as gently as possible with these people who, as far as I was concerned, were displaying classic post-decision reinforcement activity. They were never going to convince someone who is a fan of the phrase that if you see a bandwagon, you’ve already missed it, but that’s just to set the scene. 

In respect of the UK property market I should declare a further interest. I’m a recently married Tory with a fair amount of cash and no debt who doesn’t own property in the UK, but would like to. A fall in house prices would be a good thing for me.

Is this why most people I know have dismissed my predictions of falls in house prices? Do they think that I have been engaged in wishful thinking or have they done their own analysis? Further prodding reveals that these people do not seem to have a full appreciation of the economics. For some time, there has been a recognition that houses have been overpriced.  A correction involving gentle falls or plateauing in house has been parrotted by industry professionals – maybe the alternatives are too horrendous for them to contemplate! It sounds persuasive, too. It is in fact a fallacy of the middle ground. Actual evidence is that asset prices are volatile. Unlike consumable goods, the most important factor determining asset demand is expectations of future price. Seen in the context of the housing market, this manifests itself in the 2000s with people taking the most extraordinary financial gambles on property in the belief that ‘if they don’t get on the property ladder now, they will never be able to’.

In short, house prices are unlikely to move back to equilibrium levels. Just as prices overshot the fundamentals on the upside, they tend to overshoot on the downside as they did in the mid-90s. There are two other factors that are likely to lead to even more volatility this time around.

Housing As An Investment

The housing market used to be just that. Over the years it has become more like an investment market. An encouraging regulatory and tax environment has encouraged buy-to-let landlords. Predictably, derisory returns on equity over the life of the Labour government have acted as a further catalyst. Just as herd-like property speculation drove the housing market up, furious selling from property investors are driving and will drive prices down.  

Banking

Banks don’t want to lend to each other, never mind consumers who hold as collateral an asset with a falling value. I recall some years ago talking to a friend of mine, who is a senior finance guy, in the leading sub-prime lender in the UK about the risks facing the business. His view was that they could afford to be sanguine. Due to the rising housing market they had NEVER made a loss on a mortgage. Now that house prices are on the downward spiral, lenders are falling over each other not to be caught holding the baby. Bye bye 100% mortgages hello 20 % deposits.

And this is before interest rates rise or widespread job cuts and business failure really kicks in. Mark my words, house price falls have a very long way to go

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