House prices should do their level best
February 17, 2010
The papers have been full recently of stories about rising house prices. Earlier reports from the Nationwide and the Halifax have been largely confirmed by official data from the Registers of Scotland and the Department for Communities and Local Government.
All the reports are actually referring to roughly the same period with the official data for December emerging in February about a month or two after the reports issued by the lenders and the RICS. But the sheer volume of reports and the coverage they receive risks giving the impression that prices are rising more strongly than is actually the case. The temptation is to assume that the property market is back to normal and that we are at the start of another steady rise in prices when that is far from the truth.
Certainly, there is good news coming through. Lloyds Banking Group (which now owns the Bank of Scotland and the Halifax) is gearing up to raise money in the markets by selling mortgages - yes the very RMBS (Residential Mortgage Backed Securities) that were at the heart of the credit crunch. The bank raised £4 billion last September this way and is hoping to raise another £2.5 billion now. The Co-operative Bank (which now owns what was the Britannia Building Society) is doing the same and also hopes to raise £2.5 billion.
Since retail deposits aren't going to be enough to support mortgage lending, the news that at least some banks can raise some money from the markets gives grounds for hope that mortgage availability might improve.
There are some signs that this is already happening. Mortgage Brain, which supplies mortgage information to financial advisers, says that nearly 1,000 new mortgage products were launched in January - the biggest monthly increase in product numbers for over a year. The company says that this is the seventh month in a row that product availability has increased, with products numbers up 78 per cent on the levels seen six months ago.
At the same time, there is a growing consensus that prices have recovered. In the unlikely event that you haven't seen any of these reports, you can find typical examples here:
On top of that, there are an increasing number of reports from developers that they are seeing sales rise sharply. The Miller Group, for example, says that sales so far this year are 104 per cent higher than at the same time last year.
For all that, it seems unlikely in the extreme that we back to business as normal.
Firstly, it's important to remember that prices are still around 10 per cent below their peak. Even if we saw prices continue to rise by the 0.6 per cent increase reported for January by the Halifax, we would not get back to the average prices seen at the end of 2007 until the middle of 2011.
It's also worth pointing out that at least some of the recovery in prices has been driven by a drought in the number of homes coming on to the market. The reluctance of home owners to sell their homes in a weak market is a classic example of ‘Loss Aversion', a well known behaviour in which people hold assets that have fallen in value in the hope that they will recover lost ground. As the market improves, supply should too and that should help to balance supply with demand.
That doesn't mean that prices will go in to reverse, but it does mean that one of the main drivers of the recent recovery in prices will fade over time.
Equally, the increase in the number of mortgages available should not minimise the huge amount of fund raising the lenders will have to do just to keep mortgage lending at current levels. The Council of Mortgage Lenders ‘Outlook for mortgage funding markets in the UK in 2010 - 2015' makes it clear that lenders will have to fill a £300 billion funding gap when state support in the form of the Special Liquidity Scheme comes to and end in 2011-12 and the Credit Guarantee Scheme expires two years later. In short, banks will have to raise large amounts of money just to maintain their existing lending.
Add to that higher taxes, lower government spending and inflation eating away at disposal income and it is easy to see why it will be hard for house prices to push much higher.