The continued growth in house prices is good news as it shows confidence has not only returned but remains in the housing market (7 months of steadily rising prices can surely no longer be described as an aberration). However reading some of the commentaries that have accompanied the latest January figures I am left with the impression that some people are almost dis-appointed by this news as it doesn’t seem to fit with their views. I would go so far to say that there seems to be almost an attempt to talk them down.

 

Are we over-reacting here? Well there is always that possibility but just as the rise in house prices should not be seen as a surprise when looking rationally at the right data, the factors that we would look at going forward are, on the whole, more positive than negative.

 

 

 

The market in context

 

Prices began to stabilise and rise towards the middle of 2009, having fallen for the 19 previous months. Having fallen circa 23% peak to trough, prices stabilised simply because property became very affordable again through a combination of lower prices and lower interest rates. This price stability/rise occurred despite the fact that we were in the teeth of a major recession, despite the fact that mortgage finance was in short supply especially for higher LTVs, and despite unemployment fears.

 

If we now wind the clock forward 8 months to the present, all of the negative factors listed above have arguably improved. Growth is now positive (albeit by 0.1%!), mortgage finance although still in short supply has improved and unemployment has not and does not appear to be reaching the heights feared. In short things are better! We are not by any means suggesting we are out of the woods and indeed our view is that the recovery from this recession is going to be a long, slow, bumpy road. However we are on the upward slope of a recovery.

 

There is of course a risk of a ‘W’ shaped recession, however this is a matter of debate and conjecture and until any evidence to the contrary emerges, we are of the opinion that this remains a ‘V’ or perhaps an ‘L’ shaped recession (indeed most the commentators in their HPI views do not allude to this as a factor).

 

 

2010 onwards

 

So, if things are looking more rosy, why are so many views pessimistic? Well there is the obvious human trait of erring on the side of caution and reflecting the general economic situation. However the main rationale seems to be supply related and the argument goes that once more property comes onto the market prices will flatten or fall.  

 

As well as not fully subscribing to the view that price stability was driven simply by/largely by supply, we do not believe that reference back to property supply figures pre 2007 bears the significance it once did. Firstly property supply is driven by people’s desire to move, which is driven in a large part by available finance. Remove the supply of easy, ‘cheap’ (in relative terms) money and some of the aspirational buying and selling disappears. Secondly, the recession of the last 2 years has seen new house building decimated. From 250,000 new homes a year to under 75,000 has meant that the last 2 years has seen a shortfall of over 300,000 new homes being built. (Note: Before anyone suggests that this has been countered by all the EU immigrants returning home, no it hasn’t! They also have  major, arguably worse, recessions in the likes of Lithuania and Poland) .

 

Short term we believe that, short of a ‘double dip’ recession, the only event likely to cause significant price falls would be sharply rising interest rates and if you are, like us, of the view that the recovery is going to be low and slow, there is going to be little pressure here for some considerable time.

 

 

Long term

 

Having got it wrong so many times, getting firms to predict prices over coming years is very difficult. However, one firm that is prepared to commit is Savills research. We have followed their research for a number of years and always found it informative as well as generally quite accurate. Their latest views can be found here .

 

Whilst we may be in for a bumpy ride for the next year or two, the long term outlook for house prices is and remains positive.