A thoughtful article..............
UK house price bubble has not burst but shifted
By Bill Jamieson
29 January 2006IF there is one certainty in economics, it is that the biggest problems can be made to disappear depending on the statistics used. We may now have reached that point in the UK housing market where the "problem" has been made to vanish. Has not even Roger Bootle, the last pessimistic housing bear, growled in retreat and thrown in the towel?
The consensus view is that a house price crash has been averted and that the Bank of England has achieved a "soft landing". The house price bust has not materialised. The threat is now seen to be behind us.
But might not the opposite be true? Far from the threat of a house price boom and bust having subsided, it remains one of the most potent reasons for the Bank's Monetary Policy Committee not to cut interest rates this spring. The bubble risk is not buried behind us. It is still very much "out in front".
How can this be when all the evidence shows house prices have slowed and are now growing at a more sustainable pace: no busts, crashes or slumps? According to the widely quoted Halifax, UK house prices rose by
2.1% in the final three months of 2005, giving a rate of increase over the year of 5.1%, the smallest annual rise for 10 years. It calculates the average UK house price at £171,632.The Office of the Deputy Prime Minister says the annual rate of house price growth picked up slightly in November, to 2.5%, with the average home now costing £186,431. The Nationwide estimates the annual rate of house price growth last year at 3%, with the average cost of a house now £157,250 - unchanged from May. For reference, the Land Registry's average house price figure is now £194,589. Notwithstanding this divergence as to "average" prices and rates of increase, there is no doubting that the market has cooled sharply from the double-digit percentage rises recorded for 2003 and 2004.
The statistic most cited for the "no crash in sight" view is that for mortgage lending. Approvals for house purchases jumped by 51% in November on 12 months previously. The rise in seasonally adjusted mortgage lending was £5.1bn, up from £4.3bn in October and the biggest rise since July 2004. This rise continued into December, with gross lending up 25% to £26.3bn, the highest December figure since records began (1964). Gross lending for the whole of last year at £287.5bn was just 1% down on the record 2004 total.
QED, surely, for the "soft landing" school? Well, not quite. There are issues outstanding. The first is that, if this is the strength of mortgage demand before an expected series of further rate cuts, is it little wonder there is concern as to what might happen in the wake of actual cuts? The fear within the MPC is that further reductions would inflate a market that has not really lost its "bubble" characteristics, only this time around there may be no orderly means of retreat without risking a massive blow to confidence.
Another concern is the reliance on misleading statistical averages. No one lives in an "average" home. And the average figures happily quoted by the likes of the Halifax and the Nationwide obscure the reality of house price stagnation and falling prices in many regions of the UK. According to Hometrack, which monitors a broad total of 7,500 estate agents across the country, the average house price has already shown a 4.2% fall since the market peaked in the spring of 2004. Of 54 cities surveyed by Hometrack, 48 saw price falls in 2005, with reductions of up to 7% recorded.
Against this, Scotland is frequently cited as one area where the housing market is still resilient, with strong rises recorded last year. It is widely assumed that the house price to income ratio is lower (implying that price increases have still some way to go) and that the market is in a broadly healthy state.
But Scotland historically tends to lag the rest of the UK in house price movements. And the claims to a more "healthy" state of house price buoyancy relative to the rest of the UK may not be as solid as commonly thought. Last Friday, the Bank of Scotland revealed that the number of first-time buyers in Scotland had fallen to a record low. Five years ago the typical deposit was £4,992, equivalent to 23% of average earnings. Today the typical deposit is £15,762, equivalent to about 57% of average earnings. A typical first-time buyer is now unable to afford a semi-detached property in 81% of towns surveyed, compared with 9% in 2002.
Now this should worry the "no bubble" school. First, regions such as Scotland have long been cited as subdued or stable markets that help bear down on those more worrying "national averages". And second, without a stream of first-time buyers, the health of the overall market is in jeopardy. First-time buyers account for just 24% of the Scottish market, against 37% a decade ago. With the south-west of England, this is the smallest proportion of any part of the UK. Terraced properties are now unaffordable for Scottish buyers in 30% of towns, against 7% in
2002. For the record, Edinburgh is now the least unaffordable city in Scotland, with the average property price representing 7.7 times the average income of a first-time buyer. Add in the increase in unemployment and Scottish manufacturing in recession, and it is not hard to see a weak prop for arguments about the sustainability of national "average" house prices.Now there is a respectable argument, and one few would challenge, that both in Britain and in some housing markets overseas, there has been (a scary phrase, this, for seasoned stock market investors) a "one-off paradigm shift", brought about by the widespread and prolonged falls in inflation and interest rates.
Lower nominal interest rates make possible a rise in debt-to-income ratios and thus increase the amount of money buyers can afford to pay. As a result, house price to income ratios have hit historic highs, Japan of course, being the exception, still recovering from a "lost decade" of price deflation. The argument, eloquently advanced in a paper this weekend by UBS analyst Larry Hatheway, is that there has not been a house price "bubble" in the commonly understood sense of a flight from rational pricing, but a structural change leading to a change in lending practices. More people can borrow. And people can borrow more.
This is fine up to a point. But one of the many issues begged is what constitutes the standardised average house price - see the range between £158,000 and £194,000 quoted earlier - and which measure of "average" income is used. As a result, as economist James Ferguson has astutely spotted, in Britain now the price-to-income ratio can range from 6.2 times to a high-wire 8.3 times, depending on which figures are used.
Put another way, with the "right" figures you can make this latent problem vanish, even though it still lurks in the system. Talk of Britain's housing market being headed for stability and "past the worst" may yet prove dangerously complacent.