A soft landing for house prices

Paul Samter, an economist at the Council of Mortgage Lenders, argues that house prices will flatten

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.

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.
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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.