UK house prices have doubled in the last seven years and some fear a crash, but indications show no cause for alarm writes Fiona Hayes.
With a level of home ownership second only to that of Ireland, the UK housing market is understandably a highly emotive issue - indeed not just for its residents but also for the countless Irish investors who have spread their wings and invested across the Irish Sea in recent years. Add to this the flurry of property-purchase and home-makeover TV shows we are subjected to on a nightly basis, and it is clear that property is a mutual passion.
In the first seven months of 2004, UK house prices inflated by an average of 13 per cent, leaving an annual inflation rate of 22 per cent in July, according to the Halifax Bank of Scotland (HBOS) index. UK house prices have doubled between 1997 and mid-2004. The average UK house price is now £162,000 (€243,000).
Indeed, UK homeowners will have unhappy and not-too-distant memories of the now infamous bursting of the 1980s house-price bubble, where house-price rises peaked at 35 per cent annualised in 1989, only to collapse in the years thereafter. Negative equity lasted several years and repossessions soared. Indeed, at the start of 1996, house prices were still 15 per cent below their 1989 peak. Many commentators claim that this is another house price bubble, and that sure as night follows day, bubbles must eventually burst.
The doomsayers have seized on some inevitable consequences of an inflated housing market. First-time buyers have been priced out of the market by excessive absolute price levels. According to data from the Council of Mortgage Lenders, only 28 per cent of home loans were taken out by first-time buyers in the second quarter of 2004, compared with 48 per cent in the second quarter of 1999.
Over the past ten years, first time buyers have made up, on average, 44 per cent of the market. Also the buy-to-let segment has dried up as rents have come lower in response to excess supply. Indeed, the anecdotal evidence is that this has been happening for at least the last two years in the London market, just as in Dublin - but is this in itself enough to call a collapse in the housing market on aggregate?
The level of pessimism that has surrounded the market in recent months is, to my mind, far overdone and fundamentally unsound. Rather the UK housing market is in for a soft landing as none of the catalysts that traditionally bring about a housing-market collapse are serious risks at this point.
History tells us that previous housing-market collapses (or even corrections, such as was seen in Ireland in 2001) are always caused by one of three catalysts or "shocks".
The first and most common type of shock is an interest-rate shock. In the case of the UK, interest rates have now risen by 1.25 per cent, the Bank of England raising the official lending rate from a low of 3.5 per cent last November to 4.75 per cent at the latest meeting on August 5th. We expect only one more 0.25 per cent hike this year, giving a repo-rate peak of 5 per cent.
This compares very comfortably with the peak of the last interest rate cycle at 6 per cent in 2001 and the 7.5 per cent peak reached in 1998 - and when one goes back to the early 1990s where interest rates rose from 7.5 per cent in May 1988 to 15 per cent in October 1989, it is clear that this cannot possibly be counted as an "interest rate shock" in the old-fashioned sense.
The counterargument is that with households' debt burdens so high, smaller interest-rate hikes will have a larger impact on their ability to service their mortgages. Bank of England statistics show that UK households are now £1 trillion in debt, with 80 per cent of this debt secured on dwellings. Total personal borrowing is now 1.25 times income, and even lending secured on dwellings has exceeded income. Net equity withdrawal for other purposes has risen to 8 per cent from 2 per cent just three years ago, and is above the peak seen in 1988. Moreover, only 32 per cent of new mortgages in the second quarter opted for fixed-rate loans (though we would point out that this was 45 per cent before interest rates started rising last November).
Scary stuff. However, it has to be remembered that the debt-servicing burden is much lower than in the past, because of lower interest rates and increased competition in the mortgage market - indeed the proportion of income going on mortgage payments is 5-10 per cent lower than the late 1980s peak. Moreover, there is scant evidence of households getting into trouble. Although government figures showed a 13 per cent rise in repossession orders made in England and Wales during the three months to the end of June, the absolute number of repossessions is still close to 20-year lows.
A second potential catalyst is a government-policy shock. It was suggested at the time of this year's UK Budget that the Chancellor of the Exchequer, Mr Gordon Brown, might consider raising stamp duty, which at 1 per cent on properties valued from £60,000- £250,000, 3 per cent from £250,001 to £500,000 and 4 per cent thereafter is enviably low to Irish homebuyers.
However, he resisted these calls and it looks unlikely that the UK government will do any tinkering with the housing market, preferring to leave the task (and any potential blame) to the Bank of England - which the Labour government made independent immediately upon election in 1997.
A final potential shock is an adverse shock to the economic and employment backdrop. This looks highly unlikely for the UK, which enjoyed economic growth of 3.7 per cent in the second quarter of this year and an unemployment rate of just 4.8 per cent - compared to 10 per cent in the early 1990s.
Moreover, there are a number of long-term supports for the UK housing market, which are often overlooked. First, there is a fundamental, structural shortage of housing, with critical gaps between supply and demand in key urban locations.
Strict planning regulations make it more difficult to turn on the housing taps and throw apartments up willy-nilly as has been the case in Ireland in the last couple of years. Another factor that is often understated is the favourable demographic backdrop to the UK housing market. Unlike Ireland, which has only recently become a destination for immigrants from non-Irish backgrounds, the UK has been accepting large numbers of immigrants for decades, even centuries. Nowhere is this more apparent than in London, where non-UK nationals make up a huge proportion of workers.
Obviously, this creates an ongoing demand for property, for rental and purchase. Also, the UK has had divorce legislation in place for far longer than Ireland, which on top of our common tendency to delay marriage until later anyway, has resulted in a huge rise in single-person households. 31 per cent of UK households now consist of just one-person. Only one-fifth of households now consist of the "traditional" married or co-habiting couple with dependent children. Add to this the falling birth rate, and between 1971 and 2002, there was a decline in the average UK household from 2.9 persons to 2.3 persons.
There are numerous signs that the market is slowing of its own accord. The HBOS house-price data in the last two months have slowed to a 1.2-1.3 per cent monthly pace, much slower than the 2 per cent plus average seen in the first five months of the year. Mortgage approvals have slowed to the weakest level since November 2000 and mortgage lending is following suit.
Evidence of a slowdown has also come from other indicators, like the Royal Institute of Chartered Surveyors survey, which showed the balance of chartered surveyors reporting price rises over those reporting price falls at the lowest level in a year, down to just 3 per cent in July from 17 per cent in June and 43 per cent in May.
Prices in London and the south east were indicated down. Already, the differential between the average house price in London and the rest of the UK has fallen to its lowest for over 5 years. Nonetheless, the north/south divide remains wider than it was ten years ago when the average price in London was only 1.24 times the national average. Certain "micro-markets" might be subject to absolute price declines over the next year or two. But we cannot buy the argument that aggregate house prices will fall at a national level without a major shock to the system.
Fiona Hayes is an economist and senior fund manager with Hibernian Investment Managers
