One of the biggest issues that still seems to be prevalent in much of the reporting we see is the tendency to draw comparisons with the past and from this to try and extrapolate the future. Whilst it is a natural human trait to look to past experiences to try and determine outcomes, the word that continues to best describe the events of the last 24 months continues to be ‘unprecedented’.  

We have tried over the last few months to try and de-bunk some of the inaccuracies that have arisen as a result of trying to draw comparisons with the past. To date we have looked in depth at two areas, the housing recession of the 1990s  and the comparisons that have been drawn between the US/UK housing markets.  However in the last few weeks we have noticed two new areas of ‘look back and compare’ which we again believe could be mis-leading

Addressing the new inaccuracies

 The stabilisation of the housing market (which is now being consistently reported by most indices) seems to have taken some commentators and analysts by surprise. Having spent several months talking down or even dismissing the improving figures as largely aberrations, often principally on the basis that with transactions levels ‘so low’ and mortgage finance constrained, the view in some quarters was that price stability could not yet be attained. Now that the evidence is too strong to be ignored, the latest mantra that seems to be emerging to explain the current stabilisation of prices is that of a short term or temporary housing supply issue that, once it corrects and more supply comes onto the market, prices will continue to fall.  Let’s take each of these points in turn:-

Transaction levels;- There is no denying that a lack of available mortgage finance, particularly at higher LTVs and for more specialist sectors (be that large loans, non-conforming or Buy to Let) is having a significant impact on consumers’ ability to obtain loans and was a significant factor behind property price falls. However simply referencing past transaction levels doesn’t on its own tell you much other that the obvious (see graph below). As well as there being other factors at play here, such as negative equity limiting transactions and a lack of stock in the market, the main reason for the low transaction levels are unprecedented i.e. This is the first time (outside of war) where there has been a liquidity freeze. There is therefore no historical data to show the relationship between transaction levels (partly enforced) and prices. Lack of available finance has driven prices down but taking  low transaction figures on its own, ignoring housing supply issues and ignoring the fact that property is now the cheapest it has been in real terms since 1997 really doesn’t tell you where the bottom is. Even without a strong recovery in available finance a bottom will be logically reached at some point as markets adjust to the new reality.

 Supply: Whilst estate agents are reporting low level of stock (RICS reports that June stocks were 32% lower than a year ago) the supply issue is nothing new. Why supply therefore has become the new rationale for price stability is therefore something of a mystery to us. The supply issue has always been there. Making this now the central point of an argument as to why prices have/are stabilising suggests that the influence this has on prices may have been under-played in the past (something we believe) Under-supply in London and the South East has been a problem for many years and is getting worse exacerbated by a rising population, falling household size and a lack of new build.  In addition, we are hearing lots of anecdotal stories of Home Information Packs (HIPS) deterring some of the ‘unsure’ sellers from marketing their property (particularly the type defined as “I might sell if I can get the right price”).  Supply in our view is and will continue to be an ongoing issue, particularly in parts of London and the South East. Negative equity is certainly behind some of the low stock numbers but other factors also come into play and low stock may be a rather longer term self-perpetuating issue in that people won’t sell if they can’t see anything they want to buy. Although we subscribe to the view that a longer term sustainable rise in prices can’t occur without big improvements in mortgage finance, the current stock situation does mean that many experts central tenet that prices can’t rise until transaction levels improve dramatically is proving to be incorrect.

 House prices going forward  

Time will tell as to whether our view that the current price stabilisation is a permanent rather than temporary feature of the UK housing market is correct.  In economic terms we are certainly not out of the woods yet with rising unemployment set to be a feature for at least the next year.  However trying to quantify the impact of such factors such as unemployment and consumer confidence is in our view more of an art than a science. Looking back historically at such factors doesn’t really help as it is very difficult to view history out of context. The only fundamentals we believe that it is possible to use with any accuracy in a historical context are affordability (interest rates and wages), supply and price. Looking at these three factors tells you quite simply that housing is the currently the most affordable it has been for a generation.