Property pundits predict higher home values in 2013, but there are a number of hurdles standing in their way.
With £4 trillion of the UK's total personal wealth of £7 trillion invested in property, it's hardly surprising that future house prices remain a British obsession.
As happens every year, property firms -- including estate agents, mortgage lenders and property websites -- have released their end-of-year predictions for where prices will go in 2013. Many pundits expect prices to rise slightly this year, but not by much.
For example, property website Rightmove reckons that prices will rise by an average of 2%, with growth strongest in London and the south east. Halifax, one of the UK's largest mortgage lenders, expects prices to be broadly flat and unlikely to rise more than 2%.
However, we should take any such predictions with a hefty pinch of salt. This is because property pundits have a dreadful record of forecasting the future direction of house prices, as What 2012 has in store for house prices demonstrates.
Also, I believe that, by their very nature, property-related firms have a natural corporate bias towards promoting higher home values. They are cheerleaders for higher property prices, rather than dispassionate reporters on this vital economic trend.
I expect UK house prices to continue to weaken into 2013 and beyond. Here are seven solid reasons for my pessimism:
1. A slump in transactions
In 2006, a record 1.7 million homes changed hands in the UK. In 2007, the number of transactions slipped to 1.6 million, before falling off a cliff to 901,000 in 2008 as the credit crunch took hold.
Since 2009, the number of sales has not reached 900,000 in any calendar year, so transactions are running at roughly half of their peak. This is one important indicator that the UK housing market is still far from healthy.
2. No more risky mortgages
Before the long-overdue property crash arrived in the summer of 2007, lenders were scrambling to lend to anyone with a pulse. This lax lending resulted in crazy home loans such as the 125% and 130% mortgages that helped to sink Northern Rock and Bradford & Bingley.
Today, it's almost impossible to borrow even 100% of a property's valuation, as buying a home usually requires a substantial deposit. What's more, the Bank of England warned banks on Monday that they will have to put aside extra capital when lending to riskier homebuyers. This extra regulation will reduce the risk of another banking crisis by cooling down future credit and housing booms.
3. High personal debt
During the 'credit mania' of the Nineties and Noughties, UK personal debt (including mortgages) exploded from under £500 billion in mid-1997 to nearly £1.5 trillion by 2008.
This near-tripling of personal debt in a single decade has left the UK with a horrible hangover today. With personal debt now averaging close to £58,000 per household, we are in no position to start another credit-fuelled surge in house prices.
4. Weak wage growth
Fundamentally, house prices rely on earnings, because buyers need incomes to service their property debts. The bad news is that UK wage growth has been very weak since our economy started sliding in 2008. In fact, average earnings fell slightly in 2009 and, since then, have failed to keep pace with the ever-rising cost of living.
For instance, in the year to October 2012, total UK pay rose by a mere 1.3%, which is well below what is needed to maintain living standards. As a result, UK wages have not kept up with price rises since our economy went into reverse in 2008.
5. Inflation stays stubbornly above target
Inflation is a measure of the rising cost of living, usually expressed as a percentage over a previous 12-month period. The Bank of England has a target to keep inflation at or below 2% a year, as measured by the Consumer Prices Index (CPI).
Alas, by keeping its base rate at a historic low of 0.5% a year since March 2009, the Bank has contributed to inflation stubbornly staying above 2%. In fact, CPI inflation has remained above target in every month since December 2009 and stood at 2.7% in December.
These unexpectedly high rises in the cost of living put severe pressure on disposable incomes, leaving less money to spend on mortgage repayments and, ultimately, homes.
6. Interest rates are artificially low
The single biggest prop supporting house prices is the incredibly low interest rates currently on offer to new homebuyers and existing homeowners.
Thanks to the Bank of England's base rate sticking at 0.5% a year (the lowest since the Bank was founded in 1694), mortgage rates are well below historic norms. In addition, the launch of the Funding for Lending scheme in July 2012 has provided banks and other lenders with a flood of cheap cash to lend on. As a result, mortgage rates continue to plumb new depths.
While a rise in base rate this year looks unlikely, interest rates must go up eventually. This is sure to happen when fed-up bond investors force up the yields on gilts (UK government bonds) as our national finances worsen. When interest rates finally do start rising, we can expect utter carnage in the housing market.
7. Rising taxes and falling benefits
Finally, our ability to buy homes and meet mortgage repayments very much depends on disposable incomes, which are under pressure like never before. In recent history, the squeeze on take-home pay has been worse than at any time since 1921.
Rising tax bills and cutbacks to state benefits are set to hit incomes hard later this year. Through a process known as 'fiscal drag', millions more taxpayers are being dragged into higher tax bands. The withdrawal of Child Benefit from high earners and a 1% cap on many state benefits will heap more pressure on already-stretched household budgets.
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