House prices: the recovery, the truth

The latest round is complete. Yesterday, the Halifax released its latest monthly housing market survey, following recent releases from Hometrack and the Nationwide. As ever with these things the picture is mixed, but the trend seems to be clear. Perhaps a more interesting story came in The Times earlier this week, with the hint that lack of competition within the homebuilding industry has stood in the way of a full blown housing crash. The real issue for the UK housing market right now is that both demand and supply are at near historic lows. Recently the pendulum has swung in favour of demand, but only because the incredibly low level of demand is slightly less than the incredibly low level of supply. It could change on a sixpence. The Halifax had house prices down 0.5 per cent in June, after rising 2.6 per cent the month before. The Nationwide reported a 0.9 per cent rise, meaning it has nowhad prices up for three out of the last four months. Hometrack hadprices flat, for the second month in a row. Before that, prices hadbeen down for 19 months in a row. So the trend is pretty clear. After around 18 months of precipitous falls, the market is seeing signs of lift. All three agreed the factor that is pushing up prices is low supply.Hometrack said for example “scarcity of housing props up house prices.” It appears people are not putting their property on the marketbecause they are unhappy with current prices. But this only makes senseto an extent. If you are looking to move to a more expensive home,cheaper house prices should make the process easier for you. So, forexample, if your house is worth £200,000 and your mortgage is for£100,000 and you want to buy a house for £300,000 then you have toincrease your mortgage to £200,000. If on the other hand, prices fallby 25 per cent; your existing home is worth £150,000, the newprospective new home will be worth £225,000 and you will need toincrease your mortgage by £75,000. Even so, you might be better off,but your loan to value ratio for your mortgage for the new propertywould have worsened, from 66 per cent to 77 per cent. So perversely, while the costs may have moved in your favour, your lender will be less likely to provide the money. Maybe then the real problem is not so much that people don’t want to move, it is that their banks won’t provide the money. Meanwhile, The Times reckons builders are deliberately keeping prices up by drip feeding new homes on to the market. The newspaper cited research from Savills which showed that of 26,00new builds which are either finished or under construction, onlyone-third are actually for sale. It is argued that the problem is lack of competition betweenbuilders, and The Times quoted the housing designer Wayne Hemingway assaying: “For one developer to have control over a large building siteis like a high street where Woolworths is the only shop. The result isa mono-culture of identikit homes, which can be drip-fed on to themarket.” One point that often gets overlooked, is that it is still possiblefor properties to be built at a profit. The cost of building is stillless than the price of properties. The real issue is land. Land waspriced too high earlier this decade. Banks and builders have landassets on their books. If these assets were revalued at a realistic level, the result would be substantial revaluations. That’s what happens when governments prop up banks. If banks werejust allowed to fail, new banks would be formed and buy up the failedbank’s assets at market prices, which would in turn provide a newsupply of land on to the market, and the housing market could get backto reasonable volume, albeit at lower prices. There are of course good reasons to save banks, too. It just goes to show, the underlying forces at work here are complicated and full of contradiction. Article author: Michael Baxter from Defaqto,to see more articles by the author go to: http://defaqtoblog.com/iabn/ For financial advice call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400