A soft landing for house prices

Published 19 November 2007

Paul Samter, an economist at the Council of Mortgage Lenders, argues that house prices will flatten in 2008 but they will not crash.

While we will undoubtedly have a tougher economic environment ahead of us in 2008, the UK housing market will remain steady. UK house prices as a whole are likely to flatten over the next six to nine months and should pick up modestly thereafter.

Prices realised may have dropped relative to asking prices, and it is possible that prices may fall in certain areas of the UK for certain types of property. But this is a long way from a fall in prices across the country and a full blown house price crash.

There are a range of factors that will continue to support UK house prices:

First, there has not yet been a marked shift in the balance between supply and demand. Demand from first-time buyers and home movers has been softening this year and this trend looks set to continue, leading to a fall in the number of house sales. But the number of houses for sale has also fallen: limiting any excess supply in the market.

Second, the UK economy has grown more strongly than expected in recent years - so we are starting from a solid position. Despite some moderation over the next year or so, growth is expected to continue at a reasonable pace. This will support employment and income growth; they may not be as strong as over the last two years, but we are extremely unlikely to see a significant rise in unemployment. This, in turn, will contain the number of forced sellers due to deteriorating personal finances.

Thirdly, interest rates are now expected to fall over the course of next year, a significant turnaround from the position just a few months ago. This will reduce stress on household finances and also limit the number of distressed sales. Lower interest rates will make it less expensive to take out a mortgage, further supporting the market.

Finally, we have a severely constrained housing supply in the UK. We haven’t been building houses as quickly as demand for housing has increased. The number of homes added to the housing stock each year has consistently fallen below the number of new households created for more than a decade. This pent up demand will continue to provide underlying support to house prices in most areas.

There is a very recent precedent for a slowdown. In 2005, against a much weaker economic backdrop and a similar 1% rise in rates over the preceding year, house prices slowed sharply but did not fall, despite many commentators predicting they would.

There is no doubt that in the year ahead we are likely to see a considerably softer housing market than we have experienced over the past decade. But there is a significant difference between a stable market, where prices are possibly even a little higher, and declining prices where people put off buying for the foreseeable future in response.

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16 comments from readers

outside spectator
19 November 2007 at 15:15

just another horseshit lender's group "economist" who is trying to keep the sheeple in line. Don't you just love it? If it wasn't so sad to see the sheeple getting taken, then it would be funny. People need to wake up to this guy's bullshit, and realize that the economy is in a tailspin. This guy cannot "talk" the housing crunch out of existence, but if you're a sheeple, then you will follow him right off the cliff. Of course, this guy won't fall with you, he will be in the back of the line still cheerleading more sheeple to believe him as they prepare to fall into a financial abyss.

Colonel Blimp
19 November 2007 at 16:18

One should never buy or sell property. Inherit it. That's my advice. One is then elevated above the vulgar exchanges of the marketplace. Blimp Hall for ever - unless those lithographs of me and little Juanita get into the wrong hands of course...

Robert Powell
19 November 2007 at 16:19

I almost hesitate to ask but who was 'little Juanita'?

notavestedinterest
19 November 2007 at 16:22

I would like to put some data out there that makes a nonsense of what vested interest economists and the like put out during their press releases, as to why the housing market cannot worsen. There are some financial numbers for Japan that were worse than the UK, but the trends and levels of the numbers below, I hope, speak for themselves….

Population:

Population density (persons per square km) in the UK is around 250 and that of Japan is 339. The population there was still growing in 1990…the year in which house prices started falling for the next 15 years—they added lots of people over their boom period and during the decline. (n.b. Japan has even less workable land because of earthquake zones and mountains.)

UK UK

Year Population

1990 57.27m

1995 57.96m

2000 58.87m

2005 60.24m

2010 61.52m

Source: United Nations.

Japan Japan

Year Population

1980 116.81m

1985 120.84m

1990 123.54m

1995 125.47m

2000 127.03m

2005 127.90m

2010 127.76m

Source: United Nations.

Hong Kong has a population density of 6,407 and Singapore 6,369 (Singapore in particular has traditionally had large numbers of foreign workers entering). They both saw a decade of price falls, although unlike Japan this was more related to the Asian financial crisis of 1997-98 (but population density did not provide a guaranteed rise in house prices as many would suggest is the case in the UK).

Interest rates:

Unemployment in Japan in 1990 was around 3% (lower than ours), while short term interest rates (higher than policy rates) were at close to current money market rates in the UK. The increased payments, in Japan, owing to higher interest rates, were of a similar magnitude in Japan, as they are in the UK now.

Japanese money market rates

1987 4.2

1988 4.5

1989 5.4

1990 7.7

1991 7.4

1992 4.5

1993 3.0

UK inter-bank lending rate

Jun-03 3.57

Sep-03 3.5

Dec-03 3.86

Mar-04 4.11

Jun-04 4.51

Sep-04 4.85

Dec-04 4.82

Mar-05 4.85

Jun-05 4.83

Sep-05 4.55

Dec-05 4.56

Mar-06 4.53

Jun-06 4.64

Sep-06 4.85

Dec-06 5.17

Mar-07 5.49

Jun-07 5.72

Sep-07 6.29

UK and US, current numbers:

Current US and UK data:

US official rates: 4.5%

UK official rates: 5.75%

US unemployment rate: 4.7%

UK unemployment rate: 5.4%

The US, in other words, has lower interest rates and lower unemployment. There is a lot more that could be said relating to suspect economics, but I am just attempting in this case to throw out some numbers that relate to past examples and factual evidence that does not match the arguments of bulls. Moreover, this is as scientific (not very scientific at all…I have a day job and not much time) as the basis of their own analysis (they may pretend to have lots of expensive models but none of that means anything if the numbers and assumptions are manipulated to get a pre-planned conclusion), but at least mine does a cross-country comparison using data that according to them would have meant none of these other markets should have collapsed.

I should add that in my opinion this housing market is a giant liquidity driven Ponzi scheme. Of course each country is unique (there were other things going on in Japan’s case up to 1990, for example, but the point is that the arguments (immigration: population, lack of land for housing, low unemployment and low interest rates)) being used by housing bulls failed to help any of the other countries when bubbles came to bursting and liquidity declined.

I think that when the downturn does come (and every credit cycle turns) it will be driven by a the direction of how much credit is available, rather than the multitude of economic and population factors that many seem to think makes the housing market indestructible (something that is in no way backed up by any facts, as shown above). On top of that, no asset price adjustment ever returned to just zero..markets over and under shoot. Rates were lower in 2004-05. Also, income multiples still had some way to go. On top of that, banks were still eager to lend (given 50% of the price increase has been liquidity driven and one cannot buy without being given the money, this factor is VERY hard to ignore). All these factors have disappeared just as the broader economy is deteriorating.

In comparing the UK versus itself in 1990, the main difference being harped relates to lower interest rates….payments at 6.5% on 300,000 (new mortgages in London) are around the same as 15% on 100,000 (mortgages in 1990). In terms of unemployment, I assume that we will in no way be affected by the US downturn (even though we so clearly benefited from its upturn). We have been creating low paid jobs for people who cannot afford to buy anyway. Repossessions are occurring despite low unemployment…it was just a year ago when I read so many times that repossessions require a rise in unemployment…repossessions are up with no sign (yet) of higher unemployment.

Clive King
19 November 2007 at 16:45

Isn't it about time that commentators on behalf of vested interest group were called just that, rather than being given titles such as 'economist'? These commentators may have qualifications in economics, but if their job depends upon taking a particular line then they shouldn't be credited with a title which implies a high level of academic independence. Once that's sorted, why do they get so much news space. When commenting about the environment, respected news sources don't rely exclusively on environmentalists employed by BMW or Ford, yet when it comes to the property market all we ever seem to get is 'RICS' say this, or the 'CML' say that etc. This story is clearly total rubbish, we're all watching a speculative bubble beginning to pop, very loudly!

IrritatedofTonbridge
19 November 2007 at 16:56

Just wanted to point out how much I feel I personally owe to all those people who post essays rather than brief comments. Thanks. Your contribution to humanity is noted, your expertise has clear provenance and your capacity to sparkle throughout your prose is there for all to see. Please come back and answer my point. No really, I can't wait.

katherine
19 November 2007 at 17:11

Prople like Jonathan Davis of house price crash website sold his house to rent fearing a crash in 2002. He has called the top of the market ever since and promoted this as spokesman for the website hosue price crash set up by other people who "sold to rent" to speculate on a crash. they have got it spectatularly wrong for years, lost a lot of money, and persuaded goodness knows how many others to do the same. i'm glad i didnt take that financial advice from these cassandras back in 2003, or every year since, for that matter. who knows what the future will bring, a stopped clock is right twice a day , i guess.

people always have an agenda - these ones have a crash agenda to speculate on others misery. sad so many in the media appear taken in.

notavestedinterest
19 November 2007 at 17:30

I would also like to add the following….

Supply and Demand

The article assumes loans on easy terms will still be given in the first place, ort very soon. Our financial markets and the City rely on the US and so we are going to suffer in general. Moreover, falling bank profits, the need to rebuild capital bases, the loss of competitors (not just Northern Rock), means that lenders can and will have to raise their own mortgage rates for more than a year. In addition to lenders seemingly ignoring the Bank of England even if it does cut rates next year, my concern is that inflation is not dead. The issue is how far China will now be exporting inflation. Services inflation has been roaring for years and it represents over half our inflation basket, but this was offset by goods deflation because of a shift in the global goods supply curve. If services inflation remains at trend and good prices are even just stable, we will have high inflation, as China now seems to be causing an upward shift in the global goods demand curve. It is no longer possible to grow company profits through outsourcing/ cost cutting, so to maintain profits prices must rise (input costs have been rising for a long time). Also, food and commodity prices in general will remain high.

Healthy income and economic growth

Given repossessions are already going up, and income growth has remained weak for years, is it really likely that our economy, given it relies far more than most on financial services as a percentage of GDP (both in connection with the deteriorating US financial system and the deteriorating housing market in the UK), will suffer a slight "moderation" only?

Interest rates (see also Supply and Demand above)

As he is from the CML, perhaps I could get an some clarification on whether my thinking on the numbers below seems reasonable…around 1.7m fixed rate mortgages will be re-mortgaged over the next 12 months (taken out between Sept 2005 and Sept 2006) and payments will jump by between 20% (for those in the top 20% i.e. they will go from around 5% to around 6%) to 30% (for the bottom 10-20% i.e. sub-primers). There will be a payments shock even at 6%.

Housing shortage

The thing that stands out to me is that if there is a massive shortage, why have all these houses on the market not been snapped up?...the CML's own figures show that supply has increased even as new instructions have fallen. The argument that there are no forced sellers is true for now, but what happens to supply in April will be interesting (changes in the capital gains tax rules means many buy-to-letters may now be waiting for the tax advantages). Moreover, sellers have less flexibility than renters, so I suspect "forced sellers" will eventually outpace "forced new entrants".

To the question of improving rents…what if economic growth was to fall below trend for a couple of years and employment growth decelerated, as is happening? Immigration could ease or even reverse (why wait around in a place where the cost of living is high i.e. the UK, when you could travel back to Eastern Europe with what pounds have been saved here?)…many of the economic migrants are in the South east. The only X factor here is whether the current rush of immigrants is permanent or economic (I think it is the latter). The Britons who have gone abroad, on the other hand, are less likely to come home as they have greater purchasing power overseas than here, and have largely left permanently. The rental market could suffer in a scenario I consider very possible (and so therefore buy-to-let investors.

If there are some 1mn buy-to-let mortgages and hundreds of thousands of properties empty on top of this, the so-called housing supply shortage facing those who actually want to live in them disappears significantly. As an aside, there are 26m properties....one for every 2.4 people. I assume some couples still live together, kids still need parents and most immigrants live 4 to a house i.e. are the shortages really as bad as suggested? The argument that it is about location would only work if prices had not risen everywhere.

I am not sure what the new business model for buy-to-letters will be. If there is even just zero capital growth and rent is lower than interest payments (I think the effective mortgage will remain at least 5.5%% for at least 3 years because of my inflation and/ or financial market instability view) then you are losing money. Even cross-subsidising i.e. using equity and rent in one property to cover new purchases makes no sense unless the person is quite dim. If we strip out the 1mn plus investors (more than half owing multiple properties) where is the actual shortage for accommodation? Therefore, the rise in BLT mortgages from nothing to over 1m currently could be reversed i.e. they could easily (it would make financial sense to do so) follow first time buyers in not buying.

There certainly is not enough demand for rental properties, as basic economics would suggest rent would still be covering interest payments (but it is not for new investors as there are too many properties and incomes have not kept pace).

I could go on and on as to why the vested interests look at only the very best case scenario and not any plausible negatives whatsoever. How they can look at numbers like those above and not think this is a liquidity issue, bewilders me (unless I assume the logic being it their job to talk up the market).

notavestedinterest
19 November 2007 at 17:31

The last insert was for the poet.

IrritatedofTonbridge
19 November 2007 at 17:36

Thanks. You're almost as kind as you are clever.

Clive King
19 November 2007 at 18:01

katherine - whose misery? When inflation gets out of control in any other sector of the economy this is seen as a bad thing. Would you really be saying this if the average price of a modest family car had risen from, say 12k to 50k in the last 10 years? I suspect not. Houses are for people to live in, not investments to be hoarded at the expense of others. I own a house, it's nearly paid for and I look forward to 40% or more dropping from its current value in the next few years. To wish for anything else would be to condemn upcoming generations to a lifetime of mortgage misery or endless short term tenancies.

DBC Reed
19 November 2007 at 20:59

Clive King and other homeowners can weather 40%

dropping off their house prices because all the other house prices will go down too, so trading up /down will represent the same step change and if they stay put the mortgage payments won't change.. The difference will be that the younger generation will get houses to raise kids in and if prices drop low enough they will have enough purchasing-power to keep a greater percentage of the population in work. People will have more ready money to pay for more than just a roof over their heads and the transport to get to it . Mr King is right: the present attitude is "House price inflation good: wage inflation bad" and this New Statesman article toes this blandly conformist line.The 1906 Labour Party Manifesto is more up-to-the-minute than this. It recommends Land Value taxation which since the average house costs £8o,ooo to construct but £250,000 for the land to put it on,is just what is required now to tax the developers' land banks and force land onto the market, the shortage price of land being the issue, Not so long ago the NS ran a land campaign on these lines. All the best DBC Reed

aybee
22 November 2007 at 19:12

The vibe I am getting from inside the industry is that people are holding off selling due to Capital Gains Tax changes which are due to come into effect in April 2008.

The new 18% CGT liability on profits from sale will ensure that those that came into property purely as speculators will probably look to sell after then. This will mean that there will be a lot more supply, which should weaken prices further. We may therefore see reductions of upto 20- 25% in the asking price for determined sellers for the foreseeable future. In other words prices may drop to 2005 levels before they resume the endless march upwards.

This will probably only be a blip as demand continues to outstrip supply and will do so for years to come. When demand is greater than supply, there is inflation. The only way to combat it is to increase supply. Gordon Brown has said he will do this by allowing the contruction of several million homes over the next couple of decades. Some say he is getting his figures wrong, but really he is just letting the steam escape from a boiling kettle.

He will not let prices fall significantly more than this as the economy depends on demand always outstripping supply for growth. With an election looming in 18 months or so, he will be looking for a soft landing for property.

gnuneo
26 November 2007 at 14:37

"demand outstrips supply".

pray tell *when* there is not a demand for housing? People will *always* desire to invest in their housing, the crucial element missed out on that trite sound-bite is that it is not *demand* that is the key issue - its availability and affordability.

with falling wage levels (or miserly gains), with the on-rushing credit boom coming to its painful end, whilst the demand for housing will remain strong, the *actual* sales will be hurt hard.

he may want a "soft landing", however he will have to choose between softening the landing of those who own lots and lots of property, and place lots and lots of pots of money into the Labservative party, or he will choose to soften the landing of the multitudes of normal voters, who have the option of voting.

one can wonder which of these two groups will be "softened" by injections of good tax-payer monies and policies, but unless one is living in some utopian dream-cloud, it really, and unfortunately, doesn't take much effort.

Democracy? That would be nice, can we have some please?

jsouthgate
28 November 2007 at 16:11

Is property an ASSET or a LIABILITY? The total interest you pay for a mortgate over the life of the loan, and ongoing expenses, insurance, repairs, etc. suggest it's a liability. Am I correct??

jamesbt20
02 December 2007 at 18:29

The main Dynamic is "supply and demand" There arent enough houses ... period and I think the last few years boom in house prices is due in the main to the large numbers of imigrants coming here to live/work etc i reckon if large numbers of them leave for any reason it will have profound consequences

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About the writer

Paul Samter is an Economist at the Council of Mortgage Lenders. He currently specialises in the housing and mortgage markets having begun his career working in the financial markets.