There is much excellent financial and economic journalism but there are some fields of inquiry that often come up short. Analysis of that British obsession, the housing market, is, sadly, one high-profile casualty.
A recent piece in the Telegraph was a case in point. The headline declared “UK house prices to crash as global asset prices unravel”. Yes, it came with useful graphs indicating trends and suggested six reasons that house prices might end their seemingly ceaseless rise but the argument is assertive rather than analytical and does not always hold water. Prices might well fall but we need a clearer and more sober assessment of how this might happen and why it matters.
Much was said about market “fundamentals” though quite what these were was left implicit for the reader. The anticipated downturn was not given a time frame, nor was there a stab at what the depth of the correction might be – just that it was round the corner.
So, what exactly are the half dozen factors highlighted in the piece, and by others, and do they stand up to reasonable scrutiny?
1. A domino-effect
First, a price crash in global assets was attributed to the unwinding of the monetary expansion associated with quantitative easing (QE). Some of this injection was argued to have ended up in houses. The domino effect of such a crash is said to affect first commodity prices, then shares, followed thereafter by housing assets.
But what is the evidence and what is the scale of the sensitivity of UK house prices to QE and, as important, to the unwinding of that process? Why should there be a contagion that reaches into the housing market? I just don’t think we know these things with any sufficient confidence. It is true that affordability (house price to income) ratios are historically very high and a significant future correction may follow, but that is fundamentally about the limits to which the market will accept a lack of affordability, not the unwinding of a monetary transmission process.
At the same time, offsetting the QE-inspired trend for residential investment has been the more conservative housing credit conditions that have tightened lending since 2008.
2. A ‘ticking time bomb’
Second, the premise is that the housing market is some kind of “ticking time bomb” containing the seeds of its own crash. Yes, the market is inefficient thanks to things like trading chains and loss aversion when people will not sell in a falling market. But these are institutional issues and behavioural factors, not fundamentals.
The fundamentals of a complex commodity like housing are quite different to the simple demand and supply textbook story.
3. The response of small landlords
There is also the reversal of buy-to-let policy. This is potentially significant, but at this stage is overstated. While there are important tax hits on investing in properties to rent (the stamp duty hike) and holding debt in relation to such investments (the curb on tax relief), it does not follow that this will completely overwhelm the strong demand for renting – itself partly a symptom of what else ails housing.
The extent of sell-off predicted in the article – and by others – seems to me to be extreme. The large numbers of small-scale buy-to-let landlords should not be assumed to be market sensitive responsive landlords – investment may turn out to be quite sticky, even if it does turn down.
4. Overseas buyers
It is also predicted that overseas buyers will dry up. Three or four countries’ domestic issues are cited by in the article as sufficient explanation for a wider retreat. But foreign purchasers of property in a world city like London buy, sell and go elsewhere for a variety of reasons, not all of them consistent or easily discernible.
A major study of what is going in this part of the housing market remains to be done.
5. Effect of an interest rate rise
Rising interest rates are around the corner. The Bank of England may have kept rates on hold at record lows recently, but it is highly likely that rates will go up and this will have negative effects. But how much so depends on many factors, such as the distribution of fixed versus variable mortgage rates and the extent to which households can accommodate higher mortgage payments or consider refinancing.
It need not be cataclysmic but journalists are right to assume it will not be helpful. A succession of rate rises will, however, quickly become difficult for mortgage holders with a lot of variable rate housing debt.
6. Homeowner debt
Finally, homeowners are said to be “drowning” in personal debt, presumably leaving them more exposed to higher interest rates and making the economy more vulnerable. Again, and while in no way underestimating the issue, we just don’t know how the degree of individual financial distress (where it exists) translates into housing market behaviour.
Some of these factors may reasonably be expected to put downward pressure on house prices, but we simply have no sense of their relative magnitude nor of the offsetting and other factors out there such as shortage, the lack of new supply relative to household formation, and the impacts of various policy interventions. Income growth, consumer confidence and returns on alternative assets are also important. Ironically, falling asset prices elsewhere may boost housing demand.
So, housing seems to be an ideal sector for the media to manifest its hyperbolic tendencies. Sometimes this is part of the commercial business of talking up the market. But at other times it is an attempt to boil down something really quite complicated. Culturally, there also seems to be a desire to tap into the wider shared belief, starting with David Cameron, that is held about the benign primacy of home ownership (and paranoia about price falls).
The housing market is volatile and challenging for reliable forecasts. None of that lends itself to confident predictions. To paraphrase University of Warwick professor Andrew Oswald’s comment on Radio 4’s Woman’s Hour more than a decade ago:
House prices will fall, I may well have said the same last year, and one day I’ll be right.
It would be nice to have a sane conversation about housing policy and the role that a more regionally balanced housing market (including investment in affordable rented housing) could play to the benefit of society and the economy. Long-term stable real house prices would be a story worth writing about.