A recent article in the Financial Times by Chris Giles and Daniel Pimlott* (January 3 2010) reports that “Britain’s leading economists are almost unanimous in their view that house prices are still too high”.
The recent rally in house prices would seem to contradict this view but perhaps it is explained by the low interest rates and the low levels of supply. Will these factors be short lived?
Incomes are unlikely to grow in real terms and the significant increase in public sector employment levels will probably be reversed. If in addition interest rates increase further and as the tracker and low fixed rate mortgages need to be replaced, a greater number of people will struggle to meet their repayments. That in turn will toughen up the banks’ attitude to repossessions and heighten individuals’ concerns at taking on debt. The lenders will show less forbearance if they think that they can recoup their costs on repossessions whilst prices have stabilised. This could constrain further house price gains and possibly force a decline by the increase in supply.
The shortage of housing in the UK would support the market but the large deposits needed to obtain a mortgage is a significant barrier to many who want to buy their own homes or to change homes after losing much of their equity.
MoneyWeek ran an article by Dominic Frisby (December 16, 2009) in which he predicts that 2010 will be a grim year for property. He contends that the share price of builders is a leading indicator as to the direction of house prices. The house builders’ share price enjoyed substantial gains but peaked at the start of September since when they have been falling despite a continued overall stock market rally. This is taken as an indicator that house prices are due to fall within the next few months.
There are other signs to consider. The November housing market survey conducted by RICS disclosed that only 28% of surveyors reported rising, rather than falling inquiries. This has declined from 66% reported in June.
Prices achieved at auctions also indicate a faltering rally. The Fathom/Zoopla Auction Price Index for November showed that the median auctioned property sold at a discount of 22% to the conventional market, a deterioration from 18% in October.
Today’s inventory levels are “artificially” low and for the reasons explained above, tomorrow’s inventory numbers could quickly become “artificially” high as people rush to sell. Whatever transpires 2010 will be an interesting year.