Housing led us into this financial mess but it could lead us out too. The turn in US property prices in 2005 caused the sub-prime crisis that caused the credit crunch two years later which resulted today’s global recession. The boom in UK house prices reversed in October 2007, almost as soon as the crunch started.
British house prices are now 18 per cent below their peak, puncturing the feelgood factor that had allowed debt-happy consumers to live beyond their means and plunging thousands into negative equity.
Yet now there are signs of green shoots in the British property market.
Estate agents are reporting more inquiries from would-be buyers. Lending has increased from its low levels. Prices have risen in two of the last three months, according to the Nationwide mortgage lender. The annual rate of decline has fallen from 18 to 11 per cent. Indeed prices have risen over the past six months. Like reports of the first cuckoo, there are even tales of gazumping –- the boomtime practice of sellers cancelling deals to receive higher offers.
Such swallows do not necessarily make a summer but they do suggest the market is no longer in freefall and could be close to bottom. Figures from the other main lender, Halifax, do not always echo Nationwide’s but they show the same trend.
With interest rates at unprecedented low levels, government incentives such as cancelling stamp-duty for most buyers and state funding for mortgage lenders, billions have been thrown at the housing market to drag the economy out of recession. But whatever the inducements, the public will buy only if it thinks assets will retain their value. First-time buyers may welcome lower prices but they do not want falling values. However, like Britain’s relatively strong retail sales, the housing market suggests confidence has returned.
The danger is that belief prices have bottomed provokes would-be sellers to flood the market, including owners who didn’t bother trying to sell over the past two years. The market’s strength partly reflects modest demand chasing tight supply. Debt-burdened housebuilders have almost ceased production but would be tempted to restart building if sales perk up.
The state of the housing market or the building industry is not important in itself; it is the effect on the wider economy that matters — not only in terms of people being well housed but so the population has confidence to consume, thus creating jobs.
House prices are now “cheap” compared with the long-term ratio between values and incomes. However, markets normally overshoot and would be expected to fall well below that historic norm. It would take a 22 per cent rise to return prices to 2007 levels and that is unlikely in the immediate future, but a long period of flat prices is unusual too. With unemployment still rising, the green shoots could yet be crushed, but housing, having gone into recession before the rest of the UK economy, can lead it out.
