By: John Stepek
This article is taken from our FREE daily investment email Money Morning.
Every day, MoneyWeek's executive editor John Stepek and guest contributors explain how current economic and political developments are affecting the markets and your wealth, and give you pointers on how you can profit.
Sign up free here.
In this week's issue of MoneyWeek magazine
Let’s turn away from the fun of Brexit for the time being.
Let’s look at something far more important.
Let’s have an update on how the UK housing market is doing.
You could make our housing system worse, but you’d have to try hard
British house prices are far from being the world’s most important asset class. But the statistics tell me, that in the eyes of our readers and most of the British public, a spike in the ten-year US Treasury yield, a plunge in the price of oil, or a slide in the Chinese yuan, are as nothing compared to a blip in the fortunes of the most coveted asset in the UK.
And frankly, no wonder. Most of us have ploughed most of our present wealth into said asset, and many of us continue to plough massive chunks of our monthly income into it as well.
It’s hard for it not to loom large in our minds when, on top of all the emotionality of a home, you have a huge, floating-rate (or temporarily fixed-rate) debt attached to it. In many ways, those of us with mortgages are just sitting on epic spread bets.
The prize at the end of the road, is that you get to keep your house. Yes, it might have risen in value, but that’s beside the point. If you live in a house, you’ll need to buy another one. So the cost of that will have risen too.
And the government will then take a hefty chunk in the form of stamp duty – or to use a more accurate term, the “moving tax”. Once you’ve paid this moving tax, downsizing may no longer look like a viable method of “unlocking the value” in your home.
On the other hand, the risk you take is that it all goes pear-shaped and you either lose the roof over your head, or you end up desperate to move but you can’t, because you’re in negative equity (your mortgage is worth more than the equity in the house).
Wow. It’s pretty stressful when you look at it like that. You’d think we’ve have come up with a better system by now.
Particularly as it also means that the health of the banks – who provide our all-important financial plumbing – is leveraged to the health of the labour market, and therefore to economic growth. Which in turn is dependent on credit growth, and therefore on the health of the banks.
It’s one giant positive feedback loop. That sounds like a good thing, but it’s not. A negative feedback loop is one where you do something stupid, you get a slap on the wrist (negative feedback), and you stop doing it. That system tends towards equilibrium – stability.
A positive feedback loop is where you do something stupid and you get a pat on the back (positive feedback). So you keep doing it. Until one day you do something so catastrophically stupid that rather than a pat on the back or a slap on the wrist, you get a punch in the mouth. That system tends towards wild swings – or “boom and bust”, as it’s more commonly known.
I’m sure you could design a worse system if you tried (and make no mistake, this stuff is hard – if it was easy, it wouldn’t be a problem in the first place, and people who think it’s easy and wade in with their brilliant ideas usually make things worse).
The trouble is, any significant change will create losers, and a lot of them at that. So change is likely to be slow when it happens, and it will involve incremental shifts that target the politically vulnerable – such as buy-to-let landlords, for example.
The slowdown in UK house prices is not all down to Brexit
Anyway, rant over for now. What’s actually happening to prices?
According to the latest figures from Nationwide, house prices rose at an annual rate of 1.9% in November. That’s a fall in “real” (inflation-adjusted) terms, regardless of whether you gauge that by CPI, RPI, RPIX or wage inflation.
And the Royal Institution of Chartered Surveyors (Rics) isn’t feeling too cheerful either. More of their members are reporting falling prices than at any point since September 2012.
They are pinning the blame on Brexit. At this point, there’s probably something to that. To be clear, I don’t think that Brexit will have the sort of effect on house prices that should persuade the average individual to delay or accelerate a long-term decision like buying a house.
That’s not because of my political views on Brexit; it’s more because this is going to be a lengthy process one way or another (even a “hard Brexit” would involve a lot of back and forth after the initial deadline). So trying to time your sale or purchase (unless your job is likely to be directly affected by Brexit) is somewhat futile.
But if people settle on the idea of “let’s not put the house on the market until after March”, then that will obviously have an effect on the market. You can’t buy if there isn’t much out there for sale.
So there’s a bit of Brexit in there. And it’s a wonderful excuse for property commentators to settle on.
But this sense of pessimism is not new. And it’s not limited to the UK. Various overpriced parts of Australia and Canada are both seeing what I suspect is the start of a prolonged house price crash. Neither of them are attempting to leave the European Union.
The real problems with global house prices – politics and interest rates
The real issue is that both politicians and central bankers have woken up to two things. One is that “the people” are fed up of feeling unable to buy property anywhere near where they work. Two is that the 2008 financial crisis was caused by banking exposure to residential property.
On the first point, it means that politicians make various rules that make it harder for certain buyers – second home owners, landlords, and rich foreigners. On the second point, central banks might not all be raising interest rates, but they are making it harder for banks to lend against residential property. Mortgage lending is getting stricter.
On top of that, you have the fact that global capital no longer likes the idea of tying itself up in assets that are illiquid and physically impossible to shift from one country to another. And on top of that, you’ve got the fact that interest rates – the key driver of the price of a yield-focused asset like housing – are slowly but steadily grinding higher.
Will Britain avoid an actual house price crash? My gut still says “yes”, at least for now. One big risk is that nothing bad happens with Brexit (we get some variation of Theresa May’s deal, say, and we set the course for several more years of hardcore Remainer–Brexiteer sniping, but no real change).
That’s when the Bank of England might have to start paying attention to rising wages and think about hiking interest rates. Yet with most people on fixed-rate mortgages, it would probably take a while even for this shift to make itself felt.
So the “golden scenario” – whereby prices fall a bit but wages rise a good bit faster, and so you get a correction in “real” terms rather than nominal ones – still looks very possible.
Maybe then we can look at a better way to do things. But I wouldn’t bet on it.
Source: Money Week