First shares, then houses.
The last few days have reminded us that asset prices can go down as well as up.
We’ve just seen the stock market sell off.
And the January Halifax house price index has now fallen by 0.6% month-to-month, much worse than the +0.2% consensus.
What’s more, the three-month average of year-over-year price growth has declined to 2.2% from 2.7% in December.
Again this was below the +2.4% consensus. So are UK home values about to follow shares in heading south?
Seven reasons to worry about house prices
Britain’s house price barometers often give varying readings.
Current data are no exception. The most recent survey from Nationwide suggested that UK house prices have actually risen by 1.2% over the last two months.
And the Royal Institute of Chartered Surveyors (RICS) has just said that annual house price growth has slowed to around 2-3% since the Brexit vote in June 2016.
To find out what’s set to happen next, then, we need to look at some more pointers.
I’ve identified seven reasons why we should be concerned about current UK residential property values.
First, UK prices are already at historically high levels, as I wrote about last October. That suggests there’s already plenty of over-valuation risk within the market.
Second, this is the first time since straight after the Brexit referendum in June 2016 that prices on the Halifax measure have fallen for two consecutive months.
And in central London, which normally leads the way for the rest of the country, the RICS says that prices are falling almost as fast as in November. That’s when they recorded the broadest declines since 2009.
Put another way, real downward momentum could be starting to build.
Third, the UK economic backdrop hasn’t been great at the start of 2018.
Industry surveys for January suggest that manufacturing, construction and services all dropped during the month. Recent UK retail sales data have been mixed. Wages have been growing less quickly than inflation, meaning that ‘real’ (i.e. inflation–adjusted) incomes have been squeezed.
Even though unemployment is at a multi-decade low of 4.3%, none of the above is helpful for home values.
Fourth, the Halifax survey concurs with the latest findings from the RICS about declining buyer enquiries. Indeed, across Britain as a whole, new instructions to sell property have fallen by the most since May 2017, says the RICS.
This is despite November’s abolition of stamp duty for nearly all first-time buyers. The main reason that prices have held up is that supply is also decreasing rapidly.
Fifth, the back-end of 2017 saw a downturn in demand faced by housebuilders, notes the property team at Capital Economics.
“Demand for new homes had, for much of 2017, outperformed the wider housing market, driven by the Help-to-Buy scheme. But more recent data suggest site visits have begun to decline. Net reservations also fell while sales incentives have picked up. This suggests the wider housing market slowdown may be starting to spread to new-build demand as well”.
Mortgage approvals slump
Sixth, December’s mortgage approvals for house purchase – a useful forward indicator of home prices – fell sharply. The month-on-month number dipped by 5.7% and was 10.8% lower than for the same period a year before.
In fact December’s approvals by the main high street banks declined to their lowest level since January 2015 while the overall figure was the worst since April 2013.
November’s interest rate hike by the Bank of England has since led to increases in some variable mortgage rates.
So it is little wonder that re-mortgaging activity, which had soared before the rate rise, has since dropped sharply as well.
To make matters worse, cash transactions also seem to be on the decline. Seventh, even without another interest rate move by the Bank of England, overall mortgage rates are set to rise further anyway.
The Term Funding Scheme (TFS) began in August 2016 in response to the Brexit vote.
It was designed to provide cheap credit for banks to the tune of £140bn.
And it’s “been a boon for lenders, giving them access to funds…about 75bp cheaper than from wholesale markets or from private depositors”, says Pantheon Macro’s Samuel Tombs.
But “funding costs will jump from the end of February, when new lending will no longer generate borrowing allowances for banks from the TFS.
Both the recent rise in bond yields and the imminent winding-up of the TFS suggest mortgage rates will rise further”.
So, adding all these factors together, can we now expect the same sort of shakeout in UK home prices as we’ve just seen in the stock market?
Clearly, the two aren’t the same. Everything happens much more slowly in housing.
And buyers’ reasons for acquiring it can be very different to investing in shares or bonds.
Apart from the likes of buy-to-let, purchasing property is often as much of an emotional call as a monetary one.But there are still parallels with financial markets.
I reckon that global growth is now just about as good as it’s going to get in the current economic cycle.
Any slowing in the pace of expansion won’t help the UK.
Meanwhile, extra interest rate rises could further depress mortgage approvals.
We’re not looking at a great combination for British house prices here.
Supply is almost back down at last year’s record-lows and can’t keep falling.
While a crash in UK home values is unlikely, it’s certainly not impossible.
At the very least, the country could be facing a prolonged period of flat to steadily declining prices.
This doesn’t feel like the best time to sink all your spare pounds into the property market.