Where is the bottom in house prices and how long will it take to get there? These are difficult questions, but anyone who wants to buy or sell their home should try to come up with an answer.
Aside from that, since housing is most people’s greatest or second-greatest wealth – the other being their retirement or retirement entitlements – what’s happening is hugely important to the economy. A real estate crash would also crash the economy.
These questions took on new urgency last week, when Nationwide Building Society reported a 0.1 percent month-on-month price drop in May. That reversed an increase of 0.4 percent in April and resulted in an annual decline of 3.4 percent, the sharpest decline since the banking crisis of 2008-2009.
Nationwide chief economist Robert Gardner thinks the “headwinds” will get stronger as interest rates are likely to rise. Markets now think interest rates will peak at 5.5 percent, having priced in a peak of 4.5 percent in March, where they are now. That will drive up mortgage rates even further.
But Mr. Gardner notes, “a relatively soft landing remains the most likely outcome as labor market conditions remain solid and household balance sheets look relatively good.”
Streets ahead: our houses are very expensive by historical standards
Calling it a soft landing suggests some further price declines, but nothing beats the peak-to-trough declines of nearly 20 percent between 2007 and 2009, or, for those with longer memories, between 1989 and 1992.
I would trust that judgment, partly because the Nationwide is immensely experienced, but also because this is common sense.
For people who suddenly have to sell, a slack market is bad news and higher mortgage costs are of course a downer. But prices as a whole will be supported by the fact that between a quarter and a third of homes are bought for cash.
This allows us to outline the most likely outcome for the coming years. Still a few months of falling prices, but a bottom at the end of this year or early 2024. Then a slow recovery, so that in three or four years even those who were unlucky enough to buy at the peak last year will be ahead again.
But what about the longer term? After all, many elderly people who have paid off their mortgage view their home as their pension, an asset they can sell to boost their income after retirement.
That works if house prices continue to rise in real terms, that is, relative to the price of everything else. But it’s not such an attractive prospect if prices don’t keep pace with current inflation, as they did last year. In real terms, prices have fallen by more than 10 percent.
Here it is best to go back to the basics of supply, demand and affordability. It looks like supply will remain tight in much of the UK for the foreseeable future.
There are different ways of looking at the problem, but the conclusion is the same: we are not building enough homes. The Center for Cities recently found that we are short of 4.3 million homes and that the culprit, if that’s the right word, is the planning system that dates just after World War II. Between 1856 and 1939, housing construction grew by 2 percent per year.
After the Spatial Planning Act of 1947, this dropped to 1.2 percent. Even if the government meets its target of 300,000 homes per year, it will take 50 years to catch up.
In terms of demand, it is almost certain that the population will continue to rise, the only problem is the rate at which this is happening.
The biggest driver will be migration. It’s a contentious issue, but figures from the Office for National Statistics a few days ago suggested net migration in the 12 months to the middle of last year was 606,000, which was 102,000 more than previously thought.
Perhaps those numbers will decrease, but there isn’t much evidence of that at this point.
So the balance between supply and demand certainly seems to support the market. The barrier will be affordability. Rising wages and falling prices help improve the relationship, but our homes are very expensive by historical standards.
Schroders suggested last year that the ratio of prices to median incomes — about nine times wages — was the highest since 1876.
Conclusion? The housing market will remain tight for at least another generation. But affordability will prevent it from rising much further in real terms.
So a plateau, not a crash.
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