The ITEM club draws the wrong conclusion on house prices
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It says that “while data is showing that the housing market is now beginning to stabilise, the recent rise in house prices cannot be sustained beyond the spring of 2010.”
It adds “Price rises largely reflect the acute shortage of available properties, with many homeowners either trapped in negative equity or reluctant to sell for fear of locking in the losses of the past two years.
"A small number of cash-rich buyers have supported prices, but the supply of these funds is limited, which means prices are likely to dip again in the first half of next year."
“Mortgage lending remains depressed and with 56% of owner occupiers having a mortgage, it would be difficult to make a case for a sustained pickup in prices without a recovery in mortgage lending. However, this would still appear to be some way off.
Banks are continuing to restrict the amount of money that they are willing to lend, with them looking to strengthen, rather than expand, their balance sheets."
ITEM suggests that prices are likely to stagnate for the next two years, before picking up again gradually from 2011 as the wider economy strengthens and credit conditions ease.
But it will take more than five years for prices to return to their late-2007 peaks.
It adds: "The combination of rising joblessness and weak earnings growth is bad news for the housing market.
"The threat of unemployment encourages consumers to save more and to pay down debt, rather than add to their existing burden.
"The uncertainty also discourages consumers from committing to big decisions such as buying a house.
"The weakness of earnings growth has also meant that, despite the sharp drop in house prices, affordability has not improved to any great extent.
"The scarcity of mortgage supply and tough lending criteria is making it particularly difficult for first time buyers to enter the market."
I concur with much of what the ITEM Club says but draw a different conclusion as to how the property market will react over the next 2 or 3 years.
Prices bottomed out in March accordingly to the Nationwide index and since then have risen by 4.7%. As this recovers about 25% of the fall in prices I would suggest describing this as “stabilisation” underscores the extent to which prices have increased.
Although the recovery is certainly based on low, albeit rising, turnover, I expect turnover to remain low (by pre credit crunch standards) for at least 2 or 3 years for 3 principle reasons:
Around 3.5 million people with residential mortgages (out of a total of 10m) can't move unless they sell up and rent because, even though most are paying their current mortgage satisfactorily, they can't meet lenders' requirements for a new mortgage, even one of the same size.
This is either because they are in negative equity, have too little equity to provide a deposit for the new property plus the expenses of moving, have adverse credit or need to self certify their income.
Sub-prime mortgages have virtually disappeared and the availability of self-cert mortgages is not much better.
But the number of people affected in this way will reduce as property prices increase.
Some people who have a very cheap mortgage which is not portable, e.g. a low SVR or possibly a lifetime tracker, might choose not to move simply because they would have to pay a much higher rate for a new mortgage if they did move.
First-time buyers will continue to struggle to find the bigger deposits now required unless they can get help from the Bank of Mum and Dad.
Thus the number of potential sellers will be severely restricted for some time as well as the number of buyers. Although repossessions are increasing they are doing so, mainly as a result of low interest rates and government action, at a slower rate than most people envisaged when the credit crunch started.
Thus I think the arguments for being cautious about price rises because they are based on low turnover fall down because turnover will continue to be low. Some opportunist sellers will come out of the woodwork when they think prices have risen enough but others will hold on as long as they expect prices to keep rising, particularly buy-to-let investors who have reverted to lifetime tracker rates of around Bank rate + 2%.
Increasing unemployment and lack of mortgage availability is undoubtedly a problem, but prices have risen since March despite this and there are signs that mortgage availability will show a modest improvement next year, although unemployment is some way from peaking.
Furthermore, on a medium term view, the fact that housing completions this year will probably be only about 50-60,000, and not much higher next year, compared to the government's estimate that about 240,000 new dwellings are needed each year, must have an impact on prices.
In my view the key to house prices will continue to be interest rates and affordability.
Our economy is in such a mess that interest rates are likely to stay low for at least 2 years, although not necessarily with Bank Rate as low as 0.5% for the whole of that period.
Thus I expect house prices to continue rising next year, although there may be a blip early in 2010 after the Stamp Duty threshold increases from £125,000 to £175,000, which will bring some purchases forward to this year.
House prices will fall back again when interest rates rise sufficiently to make affordability a problem, although I expect lenders’ gross margins to narrow somewhat as rates rise and this will mitigate the impact of higher rates.
