It is remarkable how rabidly frenzied UK media commentary has become about a UK housing 'crash', particularly since all the various market indices still (just about) show annual growth in prices and any direct comparison with the US situation is totally misplaced. The latest apocalyptic forecasts come from the once respected but now increasingly schizophrenic pen of Anatole Kaletsky, the Times columnist and GaveKal economist; he now expects a fall of 30% in house values over the next two years, to bring them in line to historic income ratios. How original. Well, if he wants to sell me a 2010 call option on his undoubtedly prime London home at a mere 20% discount to current valuation I'm a buyer. Let's get some perspective. Firstly, the indices compiled by various organisations are based on very different methodologies in terms of weighting and point of calculation, vary between themselves radically in any given month, and are highly volatile month on month in aggregate. There's no point looking at anything shorter than the quarterly trend, and that preferably smoothed. The FT index is the only UK house price index based upon every residential property transaction in England and Wales recorded at the Land Registry as opposed to a subjective data sample. The FT index thereby includes properties sold for cash and uses the final transaction prices and the complete data set in order to provide a true measure of house price inflation and is therefore the most reliable in my view and while showing a steadily slowing growth trend, nothing the suggests an imminent precipice. Indeed, equity in UK housing is at an all time high although housing costs as a proportion of income have hit almost 21%, the highest since 1988. There is going to be a severe fall in value for one and two bedroom new build flats in regional cities such as Leeds and Manchester, where there has been a gross oversupply of new developments and a preponderance of buy-to-let investor activity, precisely the lending area worst effected by the credit crunch. Much of this activity has been transacted through aggressively marketed and unregulated 'Investor Clubs' who have bought in bulk from developers, and seem in many cases to have over-valued properties to sell on to naive new landlords with complicit surveyors, often with fraudulent multiple charges on a single property; this will be the UK's version of the sub-prime crisis and will generate material bank write-offs. The new 18% capital gains tax regime will encourage longer standing landlords to cut and run if they face long rental voids or are hemorrhaging cash monthly as financing costs rise, increasing a growing glut on estate agents books.
However, supply and demand in the wider market looks far better balanced, as relatively few family homes have been built in the last few years given chronic planning constraints and developer margin focus, and as we enter an era of credit apartheid, homeowners with a clean credit history, steady incomes and large chunks of housing equity will largely be net beneficiaries of the current rate cutting cycle. This will lead to a two tier market going forward. I would expect dramatic falls in the recent build flat sector and lower quality properties such as ex-council with negative implications for quoted developers and mortgage banks, but a more a modest correction (8-10%) in the wider market over the next 12 months absent a dramatic deterioration in the wider economy which would engender forced selling.
Crucially, the scale of recent new housing supply in the UK is massively lower per-capita and relative to population growth to that in the US, Ireland or Spain; Ireland for example was producing almost 90,000 housing units in 2006 for a population of 4m, against 185k in the UK for a 60m population and Spain averaged 700k new units in the last few years, despite total annual population growth of just 600k; the US managed almost 2m units at the peak or 12 times UK levels for a population just 5 times larger. It ain't rocket science.
This pent-up demand, whether for owner occupation or rental, is the crucial underpinning for the UK market. Going forward a prolonged period of stagnation is likely to bring valuation metrics closer to the historic norm. With the LIBOR spread near historic highs currently, I expect the BOE to ultimately begin directly buying the mortgage collateral jamming the UK banking system, thus freeing bank capital and easing the impact of the credit crunch in line with the 75bp reduction in base rates. The party may be over, but for the UK at least basic economics suggest that the roof won't quite fall in.
Sphere: Related Content
However, supply and demand in the wider market looks far better balanced, as relatively few family homes have been built in the last few years given chronic planning constraints and developer margin focus, and as we enter an era of credit apartheid, homeowners with a clean credit history, steady incomes and large chunks of housing equity will largely be net beneficiaries of the current rate cutting cycle. This will lead to a two tier market going forward. I would expect dramatic falls in the recent build flat sector and lower quality properties such as ex-council with negative implications for quoted developers and mortgage banks, but a more a modest correction (8-10%) in the wider market over the next 12 months absent a dramatic deterioration in the wider economy which would engender forced selling.
Crucially, the scale of recent new housing supply in the UK is massively lower per-capita and relative to population growth to that in the US, Ireland or Spain; Ireland for example was producing almost 90,000 housing units in 2006 for a population of 4m, against 185k in the UK for a 60m population and Spain averaged 700k new units in the last few years, despite total annual population growth of just 600k; the US managed almost 2m units at the peak or 12 times UK levels for a population just 5 times larger. It ain't rocket science.
This pent-up demand, whether for owner occupation or rental, is the crucial underpinning for the UK market. Going forward a prolonged period of stagnation is likely to bring valuation metrics closer to the historic norm. With the LIBOR spread near historic highs currently, I expect the BOE to ultimately begin directly buying the mortgage collateral jamming the UK banking system, thus freeing bank capital and easing the impact of the credit crunch in line with the 75bp reduction in base rates. The party may be over, but for the UK at least basic economics suggest that the roof won't quite fall in.
Posts
