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UK house prices, why it’s not adding up...

Now don't all cheer at once, or shout it from the roof tops, but UK house prices have apparently 'recovered' and are headed back to their peak of Aug/Sept 2007. The 'good news' doesn't stop there; do you remember that deep recession/depression, the once in a two century event that started with banks collapsing and continues with the jobless numbers spiralling out of control? Well that's over too, it's been 'healed' with the trillions of new money creation hibernating on the global banks' balance sheets. We can now look forward to zero interest credit card applications hitting the doormat and buy to let mortgages being readily available, with little or no deposit, with a return of the 125% first time buyer mortgage....At least that's what the majority of the usual suspect voices in the mainstream media would have you believe, but the reality of the current economic situation is very different...

For a pointer as to where we're at and how the current situation of false optimism may unwind in the short term read Jonathan Davis' commentary on the BBC. Whilst Jonathan and I havn't always seen eye to eye, as a housing market commentator his analysis over recent years has been spot on. As he rightly points out market trends do not follow straight lines; whether on charts or in the real world the trend for house prices is down and even the latest 'optimistic' price report from the Land Registry shows house prices 12% down on this time last year.

However, the most worrying news for those who need house prices to recover is the abysmal levels of sales transactions. In August 2007 transaction levels were at 120,000, they now flounder at 35,000 per month - equal to one per estate agent, or less if you take into account those properties sold direct by the house builders. House sale records are not available for the 1960's, however I'm reliably informed that even at the depths of the recession in the 1970's house sales volumes were greater than they currently are...

So house sale volumes are close to a quarter of their August 2007 peak, estate agents are selling (at best) a property a month, unemployment has rocketed, but house prices are up, how can this phenomena have occurred? Well, similar to a day trader looking for price action on charts, it's not easy to solve the puzzle when using the usual lagging and/or leading indicators, other than the fact that house prices were bound to hit a 'support level' and bounce, and with such low volumes that was always a nailed on certainty.

If house prices had increased in tandem with a return to 2007 transaction levels then the reckless lending and the gross speculation that underpinned the period from 2002-2007 would have returned. The fact that volumes are so pitiful proves that there is no wide recovery in the housing market, only a statistical blip in prices which cannot be sustained with such low 'churn'.

The most worrying aspect, for all those involved in any aspect of the housing market, is that the lack of churn will inevitably lead to further job losses as the industry wide stagnation continues. For example, new home sales tend to contribute for ten percent of recorded sales, on that basis less than 3,500 new homes sold last month. The reasons developers can't sell and continue to 'price to model' versus the market has been widely reported, however, at some stage developers and house builders will have to produce sales revenue over and above the current levels in order to pay the bills. Similarly home owners, comforted by the current stats., have been led into an investment paralysis cul-de-sac regarding market values.

There is a massive pent up sales demand which will eventually breach; Rightmove have in excess of one million properties for sale, their ratio of actual sales, versus properties on view, is at record levels. Other estate agent sources are actively bragging with regards to their pictures on brochures and on the walls of their inactive premises, at some stage they also have to turn a coin or perish. That turning a coin is as relevant to house sales as it is to the wider economy, banks and lenders have been able to act in a supportive manner to individuals and business in general due to low interest rates, tax payer funded bailouts and Q.E. If that zombie behaviour ceases then the UK's economic situation could deteriorate rapidly enabling house prices to finally reach a true fundamental market level determined by the ability of those who can afford to buy after accumulating a large deposit.

Based on the current average wage metrics (household income) available from the ONS an average house price of £130K would need to be reached before affordabilty is restored and this assumes a bouyant economy not decimated by job losses and contraction. Based on the latest Land Registry stats we're still 25K above that figure, therefore another decrease in prices of approx. 20% cannot be ruled out which is why first time buyers must continue to exercise great caution and offer at 20% below market rate.

There is so much 'kite flying' from various sources it's difficult not to get turned by the hype, if you can't find the level of deposit required then take comfort from the fact that your decision to stay out is (in some ways) being made for you by market forces. In the longer term the 'trend is your friend until it bends', simply wait until all the indicators suggest that trend has turned. The two best to keep a weather eye on would be a return to 5-10% deposits and sales transactions double the current numbers.


Paul Holmes


Firstrung


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