Thought for the day
Thought for the day (latest)
Sometimes controversial, sometimes quirky but always thought-provoking.
Michael Baxter, freelance journalist, provides his personal insights on current economic
and business issues - essential reading for investors interested in fuel for the mind.
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29/07/2010 - Has the housing market turned?
Anyone who was surprised by the news from the Nationwide that house prices fell in July, hasn't been paying attention.
According to the building society, prices were down 0.5 per cent in July. You would have to wind the clock back all the way to ... well, to February, for the last time that happened. Or to put it another way, you wouldn't really have to wind the clock back that far at all.
But the index from Hometrack also had prices falling - by 0.1 per cent in its case. It is the first time both indices have had negative prices since April 2009.
But the writing was on the wall, or to be more precise the writing was in the monthly surveys from the Royal Institution of Chartered Surveyors (RICS).
The last RICS report had its index tracking new instructions rising from 22 to 27, the highest level since the boom, while the index tracking enquiries was minus 5. RICS also published a sales to stock ratio, and this too has been falling sharply in recent months.
You don't need to look for the explanation: it was the end of HIPs. Once the new government put that particular requirement to an end, and putting one's property on the market became a much cheaper and easier process, supply has soared.
You need to bear in mind that demand for property has been incredibly low for over two years. Mortgage approvals are way down on the levels seen in the boom. It is just that supply also has been low. Prices rose modestly last year because even though there was a very low level of demand, it was nonetheless not as low as supply.
When demand and supply are that low, minor changes can affect prices enormously. For the same reason the summer is a difficult time for stock markets - which is why we have the saying: "Sell in May and go away."
But there is more to the changing dynamics of demand and supply than the end of HIPs. The RICS index had been highlighting a mismatch between new instructions and enquiries for all of this year. In January the index tracking instructions exceeded enquiries, and has stayed higher ever since. And the gap between growing supply and contracting demand has been growing, too.
What puzzles me is that property bulls talk about low interest rates underpinning the housing market. But how can that be? Interest rates are low because central bankers are worried about the economic outlook and they fear deflation. How can such an environment be seen as good for house prices?
The only way the current low interest rate regime can be good for the property market will be if the central bank continues to get its inflation forecast wrong. If inflation does pick up, and real interest rates stay low, then that would be good news for those with mortgages, and may prompt higher house prices. It was like that in the 1970s, when the real rate of interest, that's interest rate minus inflation, hit minus 12 per cent.
For me, there is too much preoccupation with the cost of borrowing, with not enough emphasis on repaying the initial loan. In the 1970s high mortgages were affordable in the long term because inflation effectively eroded the size of the debt.
The interest on a mortgage may be cheap, but the fact is the mortgage still has to be repaid, and in a low inflation environment, or worse than that in a deflation environment, the initial sum borrowed sits there like an immovable object.
It matters not what the demographics are saying; people cannot afford houses when the average price is around more than six times median income. Ratios like that are only affordable in times of inflation.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.
