Do the green shoots have roots?
Transcript
Well the last eighteen months or so has been very challenging for housing markets and for home owners across the world and the UK is no exception, house prices have fallen by around eighteen to twenty percent from their peak and the number of transactions, that’s actual sales, has plummeted to record lows in modern times.
But more recently certain indicators are saying that the housing market could be stabilising and we’ve seen that the reduction in the interest rate by the Bank of England has helped affordability, mortgage affordability for many home owners, so we’ve seen price decline start to ease and, in fact, on a number of measures actually rise on a month by month basis and we’ve seen the number of transactions, that’s actual number of sales increase from their lows of the beginning of this year.
On a number of measures the housing market remains quite fragile. The real question is whether the foundations are in place for a sustained recover and I would say that there are four factors that are weighing against the housing market at the moment. Firstly, first time buyers. Many first time buyers still face significant financial barriers to entering the housing market especially if they have low or no deposits at all and the price of a typical house has fallen by around forty thousand pounds since 2007 but it still costs that typical house around a hundred and sixty thousand pounds, which is where it was in around 2004, so that’s not that long ago and, until we see first time buyers return to the housing market in significant numbers, I think that the market will remain quite subdued.
Secondly, household debt relative to their income remains high and in fact in the UK is one of the highest in the whole world, so it’s difficult for households at this moment to actually absorb more debt which would be necessary really to see an increase in house prices, so that’s another factor that will weigh down on a recovery in the housing market.
Thirdly, if we do see an improvement either in the wider economy and/or the housing market, this could push up long term interest rates. Now what this means is that it will push up the cost of borrowing, the cost of paying for the mortgage and that will act as an automatic brake on house price increases.
Fourth and lastly, it’s the spectre of negative equity, negative equity is when the value of your house is actually worth less than the mortgage that you took out, and this again will subdue the housing market activity in the medium term.
The UK is not unique in seeing price declines and in fact many economies, particularly developed economies have seen house price declines over the last year or so and I would highlight Ireland, Spain and the United States as three examples. But each market does have its own unique twist and I would say that markets in Spain, Ireland the United States have a significant over supply issue that they need to work through in order for prices to stabilise, a little bit like the over supply of inner city flats in some cities within the UK. But, I would say that the good news is that probably the pace and extent of price declines are probably going to ease over the next year, but the bad news is that there’s probably another year or so of adjustment that needs to take place yet.
