How far will UK house prices fall?

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by Shaun Richards

Sometimes you spot something that you cannot let pass and that has happened this morning. There is an interesting article in the Financial Times Alphaville section by a couple of portfolio manager’s at Man Group suggesting inflation is coming. So far so good with the only issue being they are a couple of months or so behind us on here. But there is a catch as I have replied.

Thank you for the article. However I do have an issue with this.

“We are unprepared for inflation and few of us alive have ever experienced what it’s like to trade in an inflationary environment”

Anyone who has bought a house in the UK and quite a few other places has learned to do this as prices rose so much.  It is simply that (supported by the FT economics editor)it was decided by the establishment to exclude such things from the inflation data. Then when forced to try to reflect it they use fantasy imputed rents which are never paid.

In the Euro area they continue to ignore this subject in their inflation measure CPI ( HICP) as even some ECB policy makers have noted recently.

So yes there has been inflation it is just that the major inflation indices have been designed to look away now.

This is an issue which I would shout from the rooftops if I could as it explains why so many feel that inflation indices do not reflect their own circumstances. As an example ECB policy maker Phillip Lane pointed out that when asked people thought that housing costs were 33% of their expenditure but that the Euro area consumer inflation measure (HICP) only counted 6% or so ( actual rents). This has different impacts as Italy has seen very little house price growth but the Netherlands had an annual rate of 8% in May compared to this.

In May, HICP-based prices of goods and services in the Netherlands were 1.1 percent up year-on-year, versus 1.0 percent in April.

Even Statistics Netherlands points it out.

Unlike the CPI, the HICP does not take into account the costs related to home ownership.

UK House Prices

After years and indeed decades of house price rises in the UK ( there were some falls in 2008/09 but the last major fall was 1990-92). We now face a situation which will send a chill down the spine of the Bank of England so let me hand you over to The Nationwide from earlier this week.

UK house prices fell by 1.4% in the month of June, after
taking account of seasonal effects, following a 1.7% fall in
May. On a seasonally adjusted basis, house prices in June
were 3.2% lower than in April.

That will cause scenes at the Bank of England and that is before we get to this.

Annual house price growth slowed to -0.1%, from 1.8% in
May. This is the first time that annual house price growth has been in negative territory since December 2012.

There is significance in that timing because that was the time the Funding for Lending Scheme was introduced. It was badged as being for smaller businesses for deflection but quickly saw mortgage rates fall around 0.9% by my calculations and later the effect went as high as 2% according to the Bank of England. By that route net mortgage lending went positive in the summer of 2013 and the house price carousel started to build again.

London

As a London boy ( lives in Battersea, born at Waterloo) this especially caught my eye in the Nationwide report.

Annual house price growth in London edged higher, with
prices up 2.1% in Q2. Average prices in the capital are now
just 3% below the all-time highs recorded in Q1 2017 and
55% above their 2007 levels (UK prices remain 19% higher
than their 2007 peak).

Not only do we get an idea of the scale of the house price move that our official statisticians have turned their blind eye too.But then we have the claim that there is annual house price growth in London. I am rather dubious based on this from Daniel Farey-Jones who has been looking at actual rents as shown below.

Bloomsbury, down 30% to £1,517………Belgravia, down 20% to £4,312…………Mayfair, down 31%

We are in the Des Res zone so let us have some examples from more “street” areas.

Elephant (& Castle), down 20%………Marylebone, down 20%……..Borough Market, down 33%…….Fitzrovia, down 25%……Clerkenwell, down 20%

I think we get the idea and there is even something for Gerry Rafferty fans.

Baker Street, down 28%
You used to think that it was so easy
You used to say that it was so easy
But you’re trying, you’re trying now
Another year and then you’d be happy
Just one more year and then you’d be happy
But you’re crying, you’re crying now.

These are to some extent anecdotes and there will be bias in the selection but even so there is a clear message which does not sit well with the Nationwide claim about house price rises in London. At a minimum some renters may be looking at selling. That of course has its own issues with as we noted with the Bank of England data on Monday.

The number of mortgage approvals for house purchase fell to a new series low in May, of 9,300 (Chart 5). This was, almost 90% below the February level (Chart 5) and around a third of their trough during the financial crisis in 2008.

The Bank of England

There have been several speeches this week and one from Jonathan Haskel was rather downbeat.

and in my view, risks skewed to the downside
concerning employment and more medium-term economic adjustments

That is a rather curious response to the data being better than he expected but remember he was called from an Ivory Tower. But for out house price purpose today there was this.

in March we also revived our term funding
scheme to reinforce the pass-through of lower interest rates by temporarily allowing banks access to loans from
the Bank of England at close to Bank Rate.

Ah “temporarily!” We know what that means. I have spared you the section on small business lending as I covered that earlier. The reality will be that this will turn up in the mortgage market. So we have a push me pull me situation with moves like this and on the other side banks restricting credit for more risky ( lower equity or if you prefer higher loan to value) mortgage lending.

Another policy maker Chief Economist Andy “loose cannon on the decks” Haldane put it like this.

This would take the Bank’s balance sheet to around 45% of (2019) UK GDP by the
year-end, more than double its previous high-water mark . It would take the Bank’s balance sheet
to almost double its highest-ever previous level relative to the Government’s net debt stock (Chart 17).

Comment

We see a familiar situation of economic circumstances pushing UK house prices lower with the Bank of England desperately trying to resist it. There are also other factors at play as we note this from the Jonathan Haskel speech.

Whilst the pandemic has caused hardship for many, I suspect there are at least some who, perhaps secretly, are
rather enjoying working from home………..On the employer side, for firms whose workers can largely work
from home, I’m sure many are now asking themselves: what’s the point of paying sky-high rents simply in order
to be located next door to another firm who is paying sky-high rents?

As to this bit many will be doubtful.

Coming to work however does have quite a bit of value.

Oh and here is one of the clearest cases I can think of covering “He would say that wouldn’t he?”

I want to join my colleagues
on the MPC in saying a few words about why quantitative easing (QE) is not a threat to central bank
independence.

Back to house prices there is a possible ace in the pack especially for London from this.

LONDON (CNN)The United Kingdom said Wednesday it would offer a path to citizenship for eligible Hong Kong residents and condemned China’s new security law as a threat to the city’s freedom.

Apart from that I would expect house prices to shift around 10% lower as we wait to see what happens next.

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