House prices up but this is a blip

by Ed Bowsher on 04 June 2009  |  7 comments
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Halifax says house prices rose in May but I reckon it's a blip.

We saw some more green shoots in the housing market today. But I still don't think we've hit the bottom.

Today's news comes from Halifax. The mortgage bank reports a 2.6% rise in average UK house prices in May.

Halifax also points out that a lower proportion of our pay is going towards mortgage payments. Typical mortgage payments for a new borrower have declined from a peak of 48% of average disposable earnings in Autumn 2007 to 31% in the first quarter of this year. All other things being equal, that should be positive for house prices.

However, I still reckon the medium-term trend is down.

That's because our economy is still in a pretty rotten state. Sure, confidence has returned to an extent, banks aren't going  bust, and share prices have risen 25% from their lows. But I think people are forgetting that governments and individuals are carrying massive levels of debt. As soon as we see any signs of economic growth, governments will raise taxes and/or cut spending. And that means economic growth will be sluggish at best.

If economic growth is sluggish, rising house prices are unlikely.

What's more, the house price to earnings ratio is still above its long-term average. According to Halifax, it's now at 4.36, above the average of 4.0. I still expect this ratio to fall below its average at some point in this cycle.

Then there's the history argument. The last housing crash started in 1989; house prices fell a fair bit that year. Then they pretty much moved sideways in 1990 and 1991, followed by further big falls in 1992. Markets normally don't normally move in a straight line. And I don't see why this cycle should be any different.

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Postscript: The Royal Institution of Charterned Surveyours (RICS) has put out an interesting comment on the Halifax figures, so I thought I'd publish the whole statement:

'This is only the third monthly increase in prices over the last twenty-one months. The previous two gains were quickly reversed but this move appears to have more legs. Significantly, it is reflecting a similar trend in the Nationwide index (released last week.) It is also consistent with the gentle upward move in the RICS sales to stock ratio which historically has been a good lead indicator of house price inflation.'

'It is too early to say that house prices have bottomed out. Unemployment is set to rise further in the coming months and could yet climb to the 3 million mark. In addition, support for the market could be undermined by a lack of available finance for first-time buyers. Crucially, however, a lack of new instruction to estate agents is resulting in a shortage of good quality stock in the right locations. This could continue to provide support for prices in the near term.'

I'm a bit more negative than RICS. But who knows for sure?

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